UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549


______________________


FORM
10-K





ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d)


OF
THE SECURITIES EXCHANGE ACT OF 1934





For
the Fiscal Year Ended December 31, 2008





Commission
              File Number
            
            Names
      of Registrants, State of Incorporation,
              Address and Telephone
Number
            
            I.R.S.
      Employer
              Identification No.001-32462
            
            PNM
      Resources, Inc.
              (A
      New Mexico Corporation)
              Alvarado
      Square
              Albuquerque,
      New Mexico  87158
              (505)
      241-2700
            
            85-0468296001-06986
            
            Public
      Service Company of New Mexico
              (A
      New Mexico Corporation)
              Alvarado
      Square
              Albuquerque,
      New Mexico  87158
              (505)
      241-2700
            
            85-0019030002-97230
            
            Texas-New
      Mexico Power Company
              (A
      Texas Corporation)
              4100
      International Plaza
              P.O.
      Box 2943
              Fort
      Worth, TX  76113
              (817)
      731-0099
            
            75-0204070





Securities
Registered Pursuant To Section 12(b) Of The Act:





Name
      of Each ExchangeRegistrant
            
            Title of Each
      Class
            
            on Which
      RegisteredPNM
      Resources, Inc.
            
            Common
      Stock, no par value
            
            New
      York Stock Exchange





Securities
Registered Pursuant To Section 12(g) Of The Act:





Registrant
            
            Title of Each
      ClassPublic
      Service Company of New Mexico
            
            1965
      Series, 4.58% Cumulative Preferred Stock($100
      stated value without sinking fund)





Indicate
by check mark whether each registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.





PNM Resources, Inc. (“PNMR”)
            YES   ü
            NOPublic Service Company of New Mexico (“PNM”)
            YES
            NO üTexas-New Mexico Power Company (“TNMP”)
            YES
            NO  ü





Indicate
by check mark if each registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.





PNMR
            YES
            NO üPNM
            YES
            NO üTNMP
            YES  ü
            NO








Indicate
by check mark whether PNMR and PNM (1) have filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) have been subject to
such filing requirements for the past 90
days.  YES   ü    NO





Indicate
by check mark whether TNMP (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.


YES      NO  ü(NOTE:  As
a voluntary filer, not subject to the filing requirements, TNMP filed all
reports under Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months.)





Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not
contained herein, and will not be contained, to the best of registrants’
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K.  ü





Indicate
by check mark whether registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer or a smaller reporting company (as defined in
Rule 12b-2 of the Act).





Large
      accelerated filer
            
            Accelerated
      filer
            
            Non-accelerated
      filer
            
            Smaller
      Reporting CompanyPNMR
            üPNM
            
            
            
            
            üTNMP
            
            
            
            
            ü





Indicate
by check mark whether the registrants are a shell company (as defined in Rule
12b-2 of the Exchange Act). YES       NO  ü





As of
February 20, 2009, shares of common stock outstanding were.





PNMR
            86,561,686PNM
            39,117,799TNMP
            9,615





On June
30, 2008 the aggregate market value of the voting stock held by non-affiliates
of PNMR as computed by reference to the New York Stock Exchange composite
transaction closing price of $11.96 per share reported by The Wall Street
Journal, was $1,030,653,239.





PNM
AND TNMP MEET THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS (I) (1) (a) AND
(b) OF FORM 10-K AND ARE THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE
FORMAT PURSUANT TO GENERAL INSTRUCTION (I) (2).





DOCUMENTS
INCORPORATED BY REFERENCE





Portions
of the following document are incorporated by reference into Part III of this
report:





Proxy
Statement to be filed by PNMR with the SEC pursuant to Regulation 14A relating
to the annual meeting of stockholders of PNMR to be held on May 19,
2009.





This
combined Form 10-K is separately filed by PNMR, PNM and TNMP.  Information
contained herein relating to any individual registrant is filed by such
registrant on its own behalf.  Each registrant makes no representation as
to information relating to the other registrants.   When this
Form 10-K is incorporated by reference into any filing with the SEC made by
PNMR, PNM or TNMP, as a registrant, the portions of this Form 10-K that relate
to each other registrant are not incorporated by reference
therein.


ii


PNM
RESOURCES, INC. AND SUBSIDIARIES


PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES


TEXAS-NEW
MEXICO POWER COMPANY AND SUBSIDIARIES





INDEX


Page


GLOSSARY                  
vi


PART
I


ITEM
1.       BUSINESS           A-1


THE
COMPANY                 
A-1


PNMR
WEBSITE                                         
A-1


OPERATIONS                     
A-2


PNM
Electric                  
   A-2


TNMP
Electric                 
 A-3


PNM
Gas                        
   A-4


Altura                               
  A-5


Optim
Energy                   
 A-5


First
Choice                
       A-6


Corporate
and Other                             
    A-6


SOURCES
OF POWER                           
    A-6


FUEL AND
WATER SUPPLY                   A-8


RATES AND
REGULATION                    
A-9


ENVIRONMENTAL
MATTERS                                                                
A-10


COMPETITION                 
A-11


EMPLOYEES                      
A-12


DISCLOSURE
REGARDING FORWARD LOOKING STATEMENTS                         
A-12


SECURITIES
ACT DISCLAIMER           
A-13


ITEM
1A.    RISK FACTORS                        
A-13


ITEM
1B.     UNRESOLVED STAFF COMMENTS            
A-21


ITEM
2.        PROPERTIES                             A-22


ITEM
3.        LEGAL PROCEEDINGS          
A-24


ITEM
4.        SUBMISSION OF MATTERS TO A VOTE OF
SECURITY
HOLDERS                                                                                                                                                           
A-24




PART
II


ITEM
5.        MARKET FOR THE COMPANY’S
COMMON EQUITY, RELATED        
A-25


STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES


ITEM
6.        SELECTED FINANCIAL DATA                   
A-27


ITEM
7.        MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL


CONDITION
AND RESULTS OF OPERATION             
A-31


ITEM
7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURE
ABOUT


MARKET
RISK                  
A-62


ITEM
8.        FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA                 
B-1


ITEM
9.        CHANGES IN AND DISAGREEMENTS
WITH ACCOUNTANTS ON


ACCOUNTING
AND FINANCIAL DISCLOSURE            
C-1


ITEM
9A.     CONTROLS AND PROCEDURES       C-1


ITEM
9B.      OTHER INFORMATION         C-2


PART
III


ITEM 10.      
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERANCE                       
C-2


ITEM 11.       EXECUTIVE
COMPENSATION                                                                                                                                                                           C-3


ITEM 12.      
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND


MANAGEMENTAND
RELATED STOCKHOLDER MATTERS            
C-3


ITEM 13.       
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS,


AND
DIRECTOR INDEPENDENCE          
C-3


ITEM
14.       PRINCIPAL ACCOUNTING FEES AND
SERVICES           
C-3


PART
IV


ITEM 15.       EXHIBITS,
FINANCIAL STATEMENT SCHEDULES        D-1


SIGNATURESE-1


iii


GLOSSARY





Definitions:Afton
            Afton
      Generating StationAG
            New
      Mexico Attorney GeneralALJ
            Administrative
      Law JudgeAltura
            Optim
      Energy Twin Oaks, LP; formerly known as Altura Power L.P.Altura
      Cogen
            Optim
      Energy Altura Cogen, LLC; formerly known as Altura Cogen, LLC (the CoGen
      Lyondell Power Generation Facility)AOCI
            Accumulated
      Other Comprehensive IncomeAPS
            Arizona
      Public Service Company, which is the operator and a co-owner of PVNGS
      and
              Four
      CornersAPB
            Accounting
      Principles BoardAPBO
            Accumulated
      Postretirement Benefit ObligationARO
            Asset
      Retirement ObligationAvistar
            Avistar,
      Inc., a wholly-owned subsidiary of PNMRBART
            Best
      Available Retrofit TechnologyBLM
            Bureau
      of Land ManagementBoard
            Board
      of Directors of PNMRBTU
            British
      Thermal UnitCAIR
            Clean
      Air Interstate RuleCal
      PX
            California
      Power ExchangeCal
      ISO
            California
      Independent System OperatorCascade
            Cascade
      Investment, L.L.C.Continental
            Continental
      Energy Systems, L.L.C.Constellation
            Constellation
      Energy Commodities Group, Inc.CRHC
            Cap
      Rock Holding Corporation, a subsidiary of ContinentalCTC
            Competition
      Transition ChargeDecatherm
            Million
      BTUsDelta
            Delta-Person
      Limited PartnershipDOE
            Department
      of EnergyECJV
            ECJV
      Holdings, LLCEEI
            Edison
      Electric InstituteEIP
            Eastern
      Interconnection ProjectEITF
            Emerging
      Issues Task ForceEnergyCo
            EnergyCo,
      LLC, a limited liability corporation, owned 50% by each of PNMR and ECJV;
      now known as Optim EnergyEPA
            United
      States Environmental Protection AgencyEPE
            El
      Paso ElectricERCOT
            Electric
      Reliability Council of TexasESPP
            Employee
      Stock Purchase PlanFASB
            Financial
      Accounting Standards BoardFERC
            Federal
      Energy Regulatory CommissionFCPSP
            First
      Choice Power Special Purpose, L.P.FIN
            FASB
      Interpretation NumberFIP
            Federal
      Implementation PlanFirst
      Choice
            First
      Choice Power, L. P. and SubsidiariesFour
      Corners
            Four
      Corners Power PlantFPL
            FPL
      Energy New Mexico Wind, LLCFPPAC
            Fuel
      and Purchased Power Adjustment ClauseGAAP
            Generally
      Accepted Accounting Principles in the United States of
    AmericaGEaR
            Gross
      Earnings at RiskGHG G
            Greenhouse
      Gas EmissionsGWh
            Gigawatt
      hoursIBEW
            International
      Brotherhood of Electrical Workers, Local 611IRS
            Internal
      Revenue ServiceISO
            Independent
      System OperatorKWh
            Kilowatt
      Hour




iv




LBB
            Lehman
      Brothers Bank, FSB, a subsidiary of LBHLBCS
            Lehman
      Brothers Commodity Services, a subsidiary of LBHLBH
            Lehman
      Brothers Holdings Inc.LCC
            Lyondell
      Chemical CompanyLIBOR
            London
      Interbank Offered RateLordsburg
            Lordsburg
      Generating StationLuna
            Luna
      Energy FacilityMD&A
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      OperationsMoody’s
            Moody’s
      Investor Services, Inc.MW
            MegawattMWh
            Megawatt
      HourNavajo
      Acts
            Navajo
      Nation Air Pollution Prevention and Control Act, the Navajo Nation Safe
      Drinking Water Act, and the Navajo Nation Pesticide ActNDT
            Nuclear
      Decommissioning Trusts for PVNGSNinth
      Circuit
            United
      States Court of Appeals for the Ninth CircuitNMGC
            New
      Mexico Gas Company, a subsidiary of ContinentalNMED
            New
      Mexico Environment DepartmentNMPRC
            New
      Mexico Public Regulation CommissionNOPR
            Notice
      of Proposed RulemakingNOX
            Nitrogen
      OxidesNOI
            Notice
      of InquiryNRC
            United
      States Nuclear Regulatory CommissionNSPS
            New
      Source Performance StandardsNSR
            New
      Source ReviewNYMEX
            New
      York Mercantile ExchangeOASIS
            Open
      Access Same Time Information SystemOATT
            Open
      Access Transmission TariffO&M
            Operations
      and MaintenanceOPEB
            Other
      Post Employment BenefitsOptim
      Energy
            Optim
      Energy, LLC, a limited liability corporation, owned 50% by each of PNMR
      and ECJV; formerly known as EnergyCoPBO
            Projected
      Benefit ObligationPCRBs
            Pollution
      Control Revenue BondsPGAC
            Purchased
      Gas Adjustment ClausePG&E
            Pacific
      Gas and Electric Co.PM
            Particulate
      MatterPNM
            Public
      Service Company of New Mexico and SubsidiariesPNM
      Facility
            PNM’s
      $400 Million Unsecured Revolving Credit FacilityPNMR
            PNM
      Resources, Inc. and SubsidiariesPNMR
      Facility
            PNMR’s
      $600 Million Unsecured Revolving Credit FacilityPPA
            Power
      Purchase AgreementPRP
            Potential
      Responsible PartyPSA
            Power
      Supply AgreementPSD
            Prevention
      of Significant DeteriorationPUCT
            Public
      Utility Commission of TexasPVNGS
            Palo
      Verde Nuclear Generating StationPyramid
            Tri-State
      Pyramid Unit 4RCRA
            Resource
      Conservation and Recovery ActREC
            Renewable
      Energy CertificatesREP
            Retail
      Electricity ProviderRFP
            Request
      for ProposalReimbursement
      Agreement
            PNM’s
      $100 Million Letter of Credit FacilityRMC
            Risk
      Management CommitteeRTO
            Regional
      Transmission OrganizationSCE
            Southern
      Cal Edison CompanySCPPA
            Southern
      California Public Power AuthoritySDG&E
            San
      Diego Gas and Electric CompanySEC
            United
      States Securities and Exchange Commission




v




SFAS
            FASB
      Statement of Financial Accounting StandardsSJCC
            San
      Juan Coal CompanySJGS
            San
      Juan Generating StationSOAH
            State
      Office of Administrative HearingsSO2
            Sulfur
      DioxideSPS
            Southwestern
      Public Service CompanySRP
            Salt
      River ProjectS&P
            Standard
      and Poor’s Ratings ServicesTCEQ
            Texas
      Commission of Environmental QualityTECA
            Texas
      Electric Choice ActTerm
      Loan Agreement
            PNM’s
      $300 Million Unsecured Delayed Draw Term Loan FacilityTNMP
      Bridge Facility
            TNMP’s
      $100 Million Bridge Term Loan Credit AgreementTNMP
      Facility
            TNMP’s
      $200 Million Unsecured Revolving Credit FacilityThroughput
            Volumes
      of gas delivered, whether or not ownedTNMP
            Texas-New
      Mexico Power Company and SubsidiariesTNP
            TNP
      Enterprises, Inc. and SubsidiariesTri-State
            Tri-State
      Generation and Transmission Association, Inc.Tucson
            Tucson
      Electric Power CompanyTwin
      Oaks
            Assets
      of Twin Oaks Power, L.P. and Twin Oaks Power III, L.P.UAMPS
            Utah
      Associated Municipal Power SystemUSFS
            United
      States Forest ServiceValencia
            Valencia
      Energy FacilityVaR
            Value
      at RiskWSPP
            Western
      Systems Power Pool




Accounting Pronouncements (as amended and
      interpreted):APB
      25
            Accounting
      Principles Board Opinion No. 25, “Accounting for Stock Issued to
      Employees”EITF
      02-3
            EITF
      Issue No. 02-3 “Issues
      Involved in Accounting for Derivative Contracts Held for Trading Purposes
      and Contracts Involved in Energy Trading and Risk Management
      Activities”EITF
      03-11
            EITF
      Issue No. 03-11 “Reporting Realized Gains and
      Losses on Derivative Instruments that are Subject to FASB Statement No.
      133 and Not Held for Trading Purposes”EITF
      03-13
            EITF
      Issue No. 03-13 “Applying the Conditions in
      Paragraph 42 of FASB Statement No. 144 in Determining Whether to Report
      Discontinued Operations“FIN
      46R
            FIN
      46R “Consolidation of
      Variable Interest Entities an Interpretation of ARB No.
      51”FIN
      47
            FIN
      No. 47 “Accounting for
      Conditional Asset Retirement Obligations an Interpretation of FASB
      Statement No. 143”FIN
      48
            FIN
      No. 48 “Accounting for
      Uncertainty in Income Taxes”FSP
      FIN 39-1
            FSP
      FIN No. 39-1 “Amendment
      of FASB Interpretation No. 39”FSP
      FAS 157-3
            FSP
      FAS No. 157-3 “Determining the Fair Value of
      a Financial Asset When the Market for That Asset Is Not
      Active”SFAS
      5
            SFAS
      No. 5 “Accounting for
      Contingencies”SFAS
      34
            SFAS
      No. 34 “Capitalization
      of Interest Cost”SFAS
      57
            SFAS
      No. 57 “Related Party
      Disclosures”SFAS
      71
            SFAS
      No. 71 “Accounting for
      Effects of Certain Types of Regulation”SFAS
      87
            SFAS
      No. 87 “Employers'
      Accounting for Pensions”SFAS
      106
            SFAS
      No. 106 “Employers'
      Accounting for Postretirement Benefits Other Than
      Pensions”SFAS
      109
            SFAS
      No. 109 “Accounting for
      Income Taxes”SFAS
      112
            SFAS
      No. 112 “Employers’
      Accounting for Postemployment Benefits – an amendment of FASB Statements
      No. 5 and 43”SFAS
      115
            SFAS
      No. 115 “Accounting for
      Certain Investments in Debt and Equity
  Securities”SFAS
      123R
            SFAS
      No. 123R “Share Based
      Payment”SFAS
      128
            SFAS
      No. 128 “Earnings per
      Share”SFAS
      131
            SFAS
      No. 131 “Disclosures
      about Segments of an Enterprise and Related
      Information”SFAS
      133
            SFAS
      No. 133 “Accounting for
      Derivative Instruments and Hedging Activities”SFAS
      141
            SFAS
      No. 141 “Business
      Combinations”SFAS
      142
            SFAS
      No. 142 “Goodwill and
      Other Intangible Assets”




vi




SFAS
      143
            SFAS
      No. 143 “Accounting for
      Asset Retirement Obligations”SFAS
      144
            SFAS
      No. 144 “Accounting for
      the Impairment or Disposal of Long-Lived Assets”SFAS
      154
            SFAS
      No. 154 “Accounting
      Changes and Error Corrections”SFAS
      157
            SFAS
      No. 157 “Fair Value
      Measurements”SFAS
      158
            SFAS
      No. 158 “Employers'
      Accounting for Defined Benefit Pension and Other Postretirement Plans—an
      amendment of FASB Statements No. 87, 88, 106, and
      132(R)”SFAS
      159
            SFAS
      No. 159 “The Fair Value
      Option for Financial Assets and Financial Liabilities – Including an
      Amendment of FASB Statement No.
115”





vii


PART
I





ITEM
      1.
            BUSINESS





THE
COMPANY





Overview





PNMR is
an investor-owned holding company of energy and energy-related
businesses.  PNMR’s primary subsidiaries are PNM, TNMP, First Choice
and, through May 31, 2007, Altura.  PNM is a public utility with
regulated operations primarily engaged in the generation, transmission and
distribution of electricity and, through January 29, 2009, the transmission and
distribution and sale of natural gas.  PNM began service to TNMP’s New
Mexico customers effective January 1, 2007.  TNMP is a regulated
utility operating in Texas and through December 31, 2006 in New
Mexico.  In Texas, TNMP provides regulated transmission and
distribution services.  First Choice is a competitive REP operating in
Texas.  PNMR owns 50% of Optim Energy (formerly, EnergyCo), which is
focused on unregulated electric operations, principally within the areas of
Texas covered by ERCOT, including the development, operation and ownership of
diverse generation assets and wholesale marketing.





On
January 12, 2008, PNM entered into an agreement to sell its natural gas
operations, which comprise the PNM Gas segment, to NMGC, a subsidiary of
Continental, for $620 million in cash, subject to adjustment based on the level
of working capital at closing.  Financial information regarding PNM’s
gas operations, which are reflected as discontinued operations herein, is
presented in Note 23.  In a separate transaction conditioned upon the
sale of the natural gas operations, PNMR proposed to acquire CRHC, Continental’s
regulated Texas electric transmission and distribution business, for $202.5
million in cash.  On July 22, 2008, PNMR and Continental agreed to
terminate the agreement for the acquisition of CRHC.  The termination
agreement provided that Continental pay PNMR $15.0 million upon the closing of
the PNM Gas transaction.  PNMR completed the sale of its gas
operations on January 30, 2009.  PNM used proceeds from the sale to
retire short-term debt and paid a dividend of $220.0 million to PNMR. The
remaining proceeds were invested in a money market fund and will be used to pay
income taxes on the gain from the sale.  PNMR used the dividend from
PNM and the $15.0 million from Continental to retire debt.





PNMR’s
common stock trades on the New York Stock Exchange under the symbol
PNM.  PNMR was incorporated in the State of New Mexico in
2000.





Other
Information





These
filings for PNMR, PNM and TNMP include disclosures for PNMR, PNM and
TNMP.  For discussion purposes, this report will use the term
“Company” when discussing matters of common applicability to PNMR, PNM and
TNMP.  Discussions regarding only PNMR, PNM or TNMP will be indicated
as such.  A reference to “MD&A” in this report refers to Part II,
Item 7. – Management’s Discussion and Analysis of Financial Condition and
Results of Operation in this report.  A reference to a “Note” in this
Part I refers to the accompanying Notes to Consolidated Financial
Statements.





Financial
information relating to amounts of sales, revenue, net income and total assets
of reportable segments is contained in Part II, Item 7. - Management’s
Discussion and Analysis of Financial Condition and Results of Operation and Note
3.





WEBSITES





PNMR’s
Internet address is http://www.pnmresources.com; PNM’s Internet address is
http://www.pnm.com; TNMP’s Internet address is
http://www.tnpe.com.  The contents of these websites are not a part of
this Form 10-K.  The filings of PNMR, PNM, and TNMP with the SEC,
including annual reports on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K and amendments to those reports, filed or furnished pursuant
to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934, are
accessible free of charge at http://www.pnmresources.com as soon as reasonably
practicable after they are filed with, or furnished to, the
SEC.  These reports are also available upon request in print from PNMR
free of charge.  Additionally, PNMR's Corporate Governance Principles,
code of ethics (Do the Right
Thing-Principles of Business Conduct) and charters of its Audit and
Ethics Committee, Board Governance and Human Resources Committee, Finance
Committee, and Public Policy




A-1


and
Sustainability Committee  are available at
http://www.pnmresources.com/investors/governance.cfm and such information is
available in print, without charge, to any shareholder who requests
it.





OPERATIONS





PNM
Electric





PNM
Electric is an electric utility that is primarily focused on providing service
to its rate-regulated customers.  PNM Electric’s operations consist of
generation, transmission and distribution of electricity for retail electric
customers in New Mexico subject to the jurisdiction of the NMPRC and for
wholesale customers in New Mexico and Arizona subject to the jurisdiction of
FERC.  PNM Electric also provides transmission services to third
parties and, through December 31, 2006, to TNMP at which time TNMP’s operations
in New Mexico were transferred to PNM.  PNM Electric also includes the
generation and sale of electricity into the wholesale market.  This
includes the sale of excess energy from PNM’s jurisdictional assets, primarily
SJGS, PVNGS Units 1 and 2, and Four Corners, as well as the energy of its
generating plants excluded from retail rates.  PNM Electric provides
retail electric service to a large area of north central New Mexico, including
the cities of Albuquerque and Santa Fe, and certain other areas of New Mexico,
which are located in Southern New Mexico.  PNM Electric owns or leases
transmission lines, interconnected with other utilities in New Mexico, Texas,
Arizona, Colorado and Utah.  The largest non-affiliated retail
electric customer served by PNM Electric accounted for 2.0% of the PNM
Electric’s revenues for the year ended December 31, 2008. PNM was incorporated
in the State of New Mexico in 1917.





Customer
rates for retail electric service are set by the NMPRC.  In February
2007, PNM filed a general rate case with the NMPRC for all of its New Mexico
retail customers except those formerly served by TNMP.  Following
NMPRC approvals, PNM implemented new electric rates reflecting an annual $34.4
million rate increase in May 2008 and an Emergency FPPAC through which changes
in the cost of fuel and purchased power, above or below the costs included in
base rates, are passed through to customers on a monthly basis beginning in June
2008.In September
2008, PNM filed its 2008 Electric Rate Case requesting an increase in electric
rates of $123.3 million and requesting a FPPAC in the general form
authorized by the NMPRC.  In this rate case, PNM is proposing
that its Luna and Lordsburg generating plants, as well as the Valencia PPA and
the portion of PVNGS Unit 2 currently owned by another subsidiary of PNMR and
leased to PNM, be included in resources subject to NMPRC jurisdiction and
recovered through rates charged to retail customers.  The Company is
unable to predict the outcome of this rate proceeding.  See Note
17.  PNM can not request a rate increase that would go into
effect prior to January 1, 2011 for customers transferred from
TNMP.





Weather-normalized
retail electric loads decreased by 1.8% in 2008.  PNM Electric’s
system peak demands for its retail customers and firm requirements customers in
the summer and the winter for the last three years are shown in the following
table:





System
Peak Demands





2008
            
            2007
            
            2006(Megawatts)Summer
            1,901
            
            1,933
            
            1,855Winter
            1,643
            
            1,606
            
            1,616





PNM holds
long-term, non-exclusive franchise agreements for its electric retail
operations, with varying expiration dates.  These franchise agreements
allow PNM to access public rights-of-way for placement of PNM’s electric
facilities.  Franchise agreements have expired in some areas PNM
serves, including Albuquerque, Santa Fe, and the City of Rio
Rancho.  PNM remains obligated under New Mexico state law to provide
service to customers in these franchise areas despite the absence of an
effective franchise agreement, so there should be no direct impact on PNM’s
business.  The Albuquerque, Rio Rancho, and Santa Fe metropolitan
areas accounted for 32.4%, 6.8%, and 6.4% of PNM Electric’s 2008 revenues and no
other franchise area represents more than 5%.  Although PNM does not
collect or pay franchise fees in some areas it serves, PNM continues to collect
and pay franchise fees in certain parts of its service territory, including
Albuquerque, Santa Fe, and the City of Rio Rancho.





PNM
Electric owns or leases 3,165 circuit miles of electric transmission lines,
interconnected with other utilities in New Mexico, Arizona, Colorado, Texas and
Utah.  Due to rapid load growth in PNM Electric’s service




A-2


territory
in recent years and the lack of transmission development, most of the capacity
on this transmission system is fully committed during peak hours and there is
very little or no additional access available on a firm commitment basis. These
factors result in physical constraints on the system and limit the ability to
wheel power into PNM Electric’s service area from outside of New
Mexico.





PNM
Electric includes wholesale activities that consist of the generation and sale
of electricity into the wholesale market from Luna, Lordsburg, and PNM’s share
of Unit 3 at PVNGS, which are excluded from retail rates.   PNMR
embarked on a strategy to move away from certain wholesale activities within PNM
Electric.  In June 2008, PNM completed the sale of certain wholesale
power, natural gas and transmission contracts as the first step of separating
its wholesale activities from PNM. See Note 8.  In addition, the Luna
and Lordsburg assets are required to be separated from PNM Electric by January
1, 2010, under an existing NMPRC regulatory order.  PNM is proposing
that these assets be included in retail rates beginning with PNM’s 2008 Electric
Rate Case.  See Note 17.  Because PNM's share of Unit 3 at
the PVNGS is excluded from the regulatory separation requirement, it can remain
within PNM  and its power can continue to be sold on the wholesale
market.  PNM Electric also engages in activities to optimize its
existing jurisdictional assets and long-term purchase power agreements through
spot market, hour ahead, day ahead, week ahead and other sales of any excess
generation not required to fulfill PNM Electric’s retail load and contractual
commitments.  In April 2008, PNM entered into three separate contracts
for the sale of capacity and energy related to its entire ownership interest in
PVNGS Unit 3, which is 135 MW, through December 31, 2010.





PNM
Electric has entered into various firm-requirements wholesale electric sales
contracts.  These contracts contain fixed capacity charges in addition
to energy charges.  Capacity charges are fixed monthly payments for a
commitment of resources to service the contract requirements.  Energy
charges are payments based on the amount of electricity delivered to the
customer intended to compensate PNM Electric for its variable costs incurred to
provide the energy.  PNM Electric’s firm-requirements demand was 162
MW in 2008, and is expected, based solely on existing contracts, to be 102 MW in
2009, 105 MW in 2010, 108 MW in 2011, and 110 MW in 2012.  No
firm-requirements customer of PNM Electric accounted for more than 1.5% of the
PNM Electric's revenues for the year ended December 31, 2008.





TNMP
Electric





TNMP
Electric consists of all the operations of TNMP.  TNMP is a regulated
utility operating in Texas and, through December 31, 2006, in New Mexico. TNMP’s
predecessor was organized in 1925 and TNMP is incorporated in the State of
Texas.





In New
Mexico, TNMP provided integrated electricity services that included the
transmission, distribution, purchase and sale of electricity to its customers in
southwest and south central New Mexico as well as transmission to third parties
and to PNM through December 31, 2006.  PNM Electric began serving
these customers on January 1, 2007 when the TNMP New Mexico assets were
transferred to PNM.





In Texas,
TNMP Electric provides regulated transmission and distribution services under
the provisions of TECA and the Texas Public Utility Regulatory
Act.  TNMP Electric serves a market of small-to-medium-sized
communities.  Most of the communities in TNMP Electric’s service
territory have populations of less than 50,000.  In most areas that
TNMP Electric serves, it is the exclusive provider of transmission and
distribution services.





TNMP
Electric’s Texas territory consists of three non-contiguous
areas.  One portion of this territory extends from Lewisville, which
is approximately 10 miles north of the Dallas-Fort Worth International Airport,
eastward to municipalities near the Red River, and to communities north, west
and south of Fort Worth.  The second portion of its territory includes
the area along the Texas Gulf Coast between Houston and Galveston, and the third
portion includes areas of far west Texas between Midland and El
Paso.  TNMP Electric’s Texas operations lie entirely within the ERCOT
region.  ERCOT is the independent system operator that is responsible
for maintaining reliable operations for the bulk electric power supply system in
the ERCOT region, which is located entirely within Texas.  See Rates
and Regulation below for more information about ERCOT.





TNMP
Electric provides transmission and distribution services at regulated rates to
various REPs that, in turn, provide retail electric service within TNMP
Electric’s Texas service area.  As of December 31, 2008, 65 active
REPs served customers that receive transmission and distribution services from
TNMP Electric.  First Choice, TNMP Electric’s affiliated REP, was TNMP
Electric’s largest customer and accounted for 29.0% of TNMP's revenues for the
year ended December 31, 2008.  Revenues of TNMP’s next largest
customer accounted for 22.0% of revenues




A-3


and no
other customers accounted for more than 10% of revenues.





In August
2008, TNMP filed with the PUCT for an $8.7 million increase in revenues, which
would be TNMP’s first increase in rates since 2002.  Hurricane Ike,
which struck the Texas Gulf Coast on September 13, 2008, caused extensive damage
to the city of Galveston and the surrounding
communities.  Storm-related outages lowered TNMP sales volumes,
decreasing revenues, margins, and earnings. In addition, TNMP estimates power
restoration costs to be in the range of $18 million to $19 million. As a
provider of regulated transmission and distribution services under the
provisions of TECA, TNMP expects to recover prudently incurred storm-related
restoration costs in accordance with applicable regulatory and legal
principles.  On October 10, 2008, the PUCT issued a preliminary order
permitting TNMP to file supplemental testimony on costs caused by Hurricane Ike.
These costs may be included in rates or captured as a regulatory asset for
review and approval in a subsequent proceeding. TNMP’s rate case is currently
being held in abatement, pending the final determination of the costs related to
Hurricane Ike as well as anticipated debt financing costs to be included in
rates charged to customers.  TNMP is unable to predict the outcome of
this matter.





TNMP
holds long-term, non-exclusive franchise agreements for its electric
transmission and distribution services, with varying expiration
dates.  TNMP intends to negotiate and execute new or amended franchise
agreements with municipalities as they expire.  Since TNMP Electric is
the exclusive provider of transmission and distribution services in most areas
that it serves, the need to renew or renegotiate franchise agreements should not
have a material adverse impact on TNMP’s business.  The remainder of
TNMP's revenues is earned from service provided to facilities in its service
area that lie outside the territorial jurisdiction of the municipalities with
which TNMP has franchise agreements.





PNM
Gas





PNM Gas
distributed natural gas to most of the major communities in New Mexico,
including Albuquerque and Santa Fe, through January 29, 2009 under rates that
were subject to traditional rate regulation by the NMPRC.  On January
12, 2008, PNM entered into an agreement to sell PNM Gas.   On
January 30, 2009, PNM completed the sale.  See Note 2 and Note
23.





The
Albuquerque metropolitan area accounted for approximately 51.2% of the total gas
revenues in 2008.  No single sales-service customer accounted for more
than 1.0% of PNM Gas’ therm sales in 2008.  PNM Gas held non-exclusive
franchises with varying expiration dates.  Franchise agreements had
expired for the City of Rio Rancho and several smaller municipalities, although
PNM continued to collect and pay franchise fees to each of these
communities.  Franchise agreements had also expired for several
counties that PNM Gas serves.  PNM Gas remained obligated to serve
these franchise areas pursuant to state law.





PNM Gas
had a customer base that included both sales-service customers and
transportation-service customers.  Sales-service customers purchased
natural gas and received transportation and delivery services from PNM Gas for
which PNM Gas received both cost-of-gas and cost-of-service
revenues.  Cost-of-gas revenues collected from its sales-service
customers were recovered in accordance with NMPRC regulations through the PNM
Gas PGAC and represented a pass-through of the cost of natural gas to the
customer.  As a result, increases or decreases in gas revenues
resulting from wholesale gas price fluctuations did not impact gross
margin.  The NMPRC had approved an agreement regarding the hedging
strategy of PNM Gas and the implementation of a price management fund program
which included a continuous monthly balancing account with a carrying
charge.  This carrying charge had the effect of keeping PNM Gas whole
on purchases of gas since it was compensated for the time value of money that
existed due to any delay in collections from customers.  Additionally,
PNM Gas made occasional gas sales to off-system sales
customers.  Off-system sales deliveries generally occured at pipeline
interconnections with the PNM Gas system and profits were shared between PNM Gas
and its regulated customers on a 30%/70% basis.





PNM Gas
had 39 transportation-service customers in 2008, which procured gas for their
end users independently of PNM Gas end users.  Transportation-service
customers were gas marketers and producers contracting with PNM Gas for
transportation services to their end users and for other related services that
provided PNM Gas with cost-of-service revenues only.  Transportation
services were provided to transportation-service customers at locations
throughout the PNM Gas distribution system, as well as points on and off PNM Gas
transmission pipelines.  Through its transportation-service customers,
PNM Gas provided gas transportation deliveries to 2,624 end users that were not
PNM Gas customers at the end of 2008.





A-4


In 2008,
41% of the total gas throughput of PNM Gas was related to transportation gas
deliveries.  The transportation rates of PNM Gas were unbundled, and
transportation customers only paid for the service they received.  In
2008, revenues from transportation customers accounted for 3.2% of the total gas
revenues of PNM Gas.  Revenues from sales-service customers accounted
for the remaining 96.8%.  Cost of gas, on which PNM Gas made no
margin, accounted for 71.8% of total sales-service revenue.  Because a
major portion of the PNM Gas load was related to heating, sales levels were
affected by the weather.  In 2008, 63.1% of the total sales occurred
in the months of January, February, March and December.





PNM Gas
obtained its supply of natural gas primarily from sources within New Mexico by
contracting with third party producers and marketers.  These contracts
were generally sufficient to meet peak-day demand.  PNM Gas served
certain cities that depend on El Paso Natural Gas Company or Transwestern
Pipeline Company for transportation of gas supplies.  Because these
cities were not directly connected to the transmission facilities of PNM Gas,
gas transported by these companies was the sole supply source for these
cities.  Such gas transportation was regulated by the
FERC.





Altura





On April
18, 2006, PNMR’s wholly owned subsidiary, Altura, purchased Twin Oaks, which
included a 305 MW coal-fired power plant located 150 miles south of Dallas,
Texas.  PNMR acquired Twin Oaks to expand its merchant generation
capacity in order to serve a growing wholesale market in the Southwest.
Effective June 1, 2007, PNMR contributed Altura, including Twin Oaks, to Optim
Energy.  See Note 2 and Note 22.  The results of Twin Oaks
operations have been included in the Consolidated Financial Statements of PNMR
from April 18, 2006 through May 31, 2007.





Optim
Energy





In
January 2007, PNMR and ECJV created EnergyCo to serve expanding U.S. markets,
principally the areas of Texas covered by ERCOT.  In February 2009,
the name of EnergyCo was changed to Optim Energy and references to Optim Energy
herein encompass periods prior to the name change.  ECJV is a wholly
owned subsidiary of Cascade, which is a large PNMR shareholder.  PNMR
and ECJV each have a 50 percent ownership interest in Optim Energy, a limited
liability company.  On June 1, 2007, PNMR contributed its ownership of
Altura, including the Twin Oaks plant, to Optim Energy at fair value of $549.6
million, as adjusted to reflect changes in working capital.  ECJV made
a cash contribution to Optim Energy equal to 50% of the fair value amount and
Optim Energy distributed that cash to PNMR. In August 2007, Optim Energy
completed the acquisition of the Altura Cogen plant, a cogeneration electric and
steam generating plant, and is co-developing another electric generating unit at
Cedar Bayou that is scheduled to be completed in the summer of
2009.





Optim
Energy’s strategy is focused on unregulated operations in one of the nation’s
growing power markets.  Optim Energy’s business consists of
development, operation and ownership of diverse generation assets, and wholesale
marketing and trading to optimize its assets.  PNMR accounts for its
50% ownership interest in Optim Energy using the equity method of accounting
because PNMR’s ownership interest results in significant influence, but not
control, over Optim Energy and its operations.  PNMR records as income
its percentage share of earnings or losses of Optim Energy and carries its
investment at cost, adjusted for its share of undistributed earnings or
losses.  Accordingly, Optim Energy’s revenues and expenses are not
included in PNMR’s consolidated revenues and expenses. See Note 22.





A-5


First
Choice





First
Choice is a certified REP operating in ERCOT, which provides electricity to
residential, small commercial and governmental customers.  First
Choice’s services include acquiring retail customers, setting up retail
accounts, handling customer inquiries and complaints, and acting as a liaison
between the transmission and distribution companies and retail
customers.  First Choice focuses its competitive customer acquisition
efforts in the major Texas metropolitan areas that are open to electric choice
within ERCOT, including Dallas-Fort Worth, Houston, Corpus Christi, and
McAllen-Harlingen.  Due to the competitive nature of the Texas market,
First Choice, along with other REPs, experiences significant turnover in its
customer base.  There is no provision under Texas regulation that
requires customers to pay their previous REP before obtaining service from
another REP.  This has been exacerbated by the impacts of Hurricane
Ike and depressed economic conditions and has resulted in significant increases
in the levels of uncollectible accounts and bad debt
expense.  Although First Choice is regulated in certain respects by
the PUCT under ERCOT, its business is not subject to traditional rate of return
regulation.





First
Choice’s load fluctuates continuously due to, among other things, customer
additions and losses, changes in customer usage, and seasonality of
weather.  First Choice continually monitors and revises its load
forecast to account for changing competitive customer loads.  First
Choice develops short-term load forecasts to identify short-term load surpluses
and shortages, and to ensure that hedges are in place to cover forecasted
sales.  To the extent these short-term load forecasts identify
shortages, First Choice covers shortages through short-term power purchases or
through purchases on the ERCOT balancing market.





First
Choice experiences increased sales and operating revenues during the summer
months as a result of increased air conditioner usage in hot
weather.  In 2008, approximately 41% of First Choice’s consolidated
annual revenues were recorded in June, July, and August.





First
Choice is exposed to market risk to the extent that its retail rates or cost of
supply fluctuates with market prices.  Additionally, fluctuations in
First Choice retail load requirements greater than anticipated may subject First
Choice to market risk.  First Choice’s basic strategy is to minimize
its exposure to fluctuations in market energy prices by matching fixed price
sales contracts with fixed price supply.





Corporate
and Other





PNMR
Services Company provides corporate services through shared services agreements
to PNMR, to all of PNMR's business units, including First Choice, PNM and TNMP,
and to Optim Energy.  These services are charged and billed on a
monthly basis to the business units.  Billings are at cost, except for
Optim Energy, which includes a profit element.  PNMR Services Company
is included in the Corporate and Other segment.





SOURCES
OF POWER





PNMR





First
Choice assumed the energy supply activities of TNMP in Texas in
2002.  Constellation was the primary supplier of power for First
Choice’s customers through the end of 2006.  Additionally,
Constellation agreed to supply power in certain transactions under the PSA
beyond the date when that commitment expired.  The obligations of
Constellation were extended until January 31, 2008.  First Choice has
no long-term power supply agreements.  Therefore, First Choice is
exposed to market risk if power prices increase faster or in excess of its
ability to increase rates to its customers.  Since January 1, 2008,
power to serve its customers has been obtained through short-term market
purchases.





PNM





As of
December 31, 2008, the total net generation capacity of facilities owned or
leased by PNM was 2,313 MW.  See Item 2. Properties.  PNM
also obtains power under long-term PPAs as described below.  PNM
Electric’s total generation capacity from these sources is:










A-6




Owned
      and leased
              2,313
      MWLong-term
      PPAs:


New
      Mexico Wind Energy Center
            200
      MWSPS
      contingent
            150
      MWTri-State
            50
      MWTotal
            2,713
      MW







Owned
and Leased





SJGS’
equivalent availability was 76.5% and 80.4% for the years ended December 31,
2008 and 2007.  PVNGS’ equivalent availability was 83.0% and 77.3% for
the years ended December 31, 2008 and 2007.  Four Corners’ equivalent
availability was 78.8% and 78.5% for the years ended December 31, 2008 and
2007.  SJGS is operated by PNM. Four Corners and PVNGS are operated by
APS.





PNM’s
Lordsburg plant was built to serve wholesale customers and other sales rather
than New Mexico retail customers.  In 2004, a subsidiary of PNMR
purchased a one-third interest in Luna, a 570 MW, partially constructed, natural
gas-fired power plant near Deming in southern New Mexico.  In 2005,
the one-third interest in Luna was transferred to PNM.  Although these
plants are not currently included in the retail rates, PNM is proposing that
they be included in rates charged to retail customers beginning with the 2008
Electric Rate Case.   See Note 17.





In 2007,
PNM Electric completed the conversion of Afton to a combined cycle
plant.  The NMPRC has approved bringing Afton into retail rates, with
50% of Afton's capacity designated to serve TNMP's former New Mexico customers,
which were transferred to PNM effective January 1, 2007, and the other 50%
designated to serve PNM Electric's other regulated customers.





PNM
leases portions of PVNGS and the lease payments are being recovered through
retail rates approved by the NMPRC.  PNM is proposing that it acquire
the ownership of a portion of PVNGS Unit 2 leased to PNM that is currently owned
by another PNMR subsidiary and that it be included in rates charged to retail
customers on an ownership basis beginning with the 2008 Electric Rate
Case.  See Item 2. Properties, Note 7, and Note 17 for additional
information.





In 1996,
PNM entered into an operating lease agreement for the rights to all the output
of the Delta gas-fired generating plant for 20 years.  The plant
received FERC approval for "exempt wholesale generator" status. The maximum
dependable capacity under the lease is 132 MW.  The gas turbine
generating unit is operated by Delta and is located on PNM’s retired Person
Generating Station site in Albuquerque.  Primary fuel for the gas
turbine generating unit is natural gas provided by wholesale gas
purchases.  In addition, the unit has the capability to utilize low
sulfur fuel oil if natural gas is neither available nor cost
effective.





On April 18, 2007, PNM entered into a
PPA to purchase all of the electric capacity and energy from Valencia, a natural
gas-fired power plant near Belen, New Mexico.  Valencia became
operational on May 30, 2008.  A third-party built, owns and operates
the facility while PNM is the sole purchaser of the electricity generated. The
term of the PPA is for 20 years beginning June 1, 2008.  Although
Valencia is not currently included in retail rates, PNM is proposing that it be
included in the Emergency FPPAC and included in retail rates charged to
customers beginning with the 2008 Electric Rate Case.  PNM has
evaluated the accounting treatment of this arrangement and concluded that the
third party entity that owns Valencia is a variable interest entity and that PNM
is the primary beneficiary of the entity under FIN 46R since PNM will absorb the
majority of the variability in the cash flows of the plant.  As the
primary beneficiary, PNM consolidates the entity in its financial
statements.  Accordingly, the assets of Valencia are included in the
consolidated financial statements of PNM although PNM has no legal ownership
interest or voting control of the variable interest entity.  The 148
MW capacity of Valencia is reflected as owned in the above table.  See
Note 9 and Note 17.





PPAs





In
addition to generating its own power, PNM Electric purchases power in the open
market under long-term PPAs.  PNM also purchases power in the forward,
day-ahead and real-time markets.







A-7


In 2002,
PNM entered into an agreement with FPL to develop a 200 MW wind generation
facility in New Mexico.  PNM began receiving commercial power from the
project in June 2003.  FPL owns and operates the New Mexico Wind
Energy Center, which consists of 136 wind-powered turbines on a site in eastern
New Mexico.  PNM has a contract to purchase all the power and RECs
generated by the New Mexico Wind Energy Center for 25
years.





In
addition, PNM has long-term PPAs with SPS to purchase 150 MW interruptible power
through May 2011 and with Tri-State to purchase 50 MW of firm power and capacity
through June 2010.  See Owned and Leased above
regarding the Valencia PPA.





A summary
of purchased power is as follows:





Year
      Ended December 31,2008
            
            
            2007
            
            
            2006Purchased
      under long-term PPAsMWh
            
            
            2,274,276
            
            
            
            2,370,364
            
            
            
            2,094,510Cost
      per MWh
            
            $
            57.43
            
            
            $
            47.23
            
            
            $
            47.36Other
      purchased powerTotal
      MWh
            
            
            2,640,131
            
            
            
            6,575,882
            
            
            
            5,993,846Cost
      per MWh
            
            $
            68.82
            
            
            $
            61.97
            
            
            $
            58.27





TNMP





TNMP
provides only transmission and distribution services and does not sell
power.





FUEL
AND WATER SUPPLY





PNMR





The coal
requirements for Twin Oaks were supplied by a long-term fuel supply agreement
during the period PNMR owned Twin Oaks.  PNMR and Altura are not
responsible under this agreement for the decommissioning or reclamation costs of
the supplying mine.  Upon PNMR’s contribution of Altura to Optim
Energy, PNMR has no benefits or obligations under this fuel supply
agreement.





PNM





The
percentages of PNM’s generation of electricity (on the basis of KWh) fueled by
coal, nuclear fuel and gas and oil, and the average costs to PNM of those fuels
per million BTU, during the past three years were as follows:





Coal
            
            Nuclear
            
            Gas
      and OilPercent
      of
            
            Average
            
            Percent
      of
            
            Average
            
            Percent
      of
            
            AverageGeneration
            
            Cost
            
            Generation
            
            Cost
            
            Generation
            
            Cost2008
            58.7%
            
            $2.28
            
            27.9%
            
            $0.51
            
            13.4%
            
            $8.102007
            65.1%
            
            $1.79
            
            27.2%
            
            $0.53
            
            7.7%
            
            $5.282006
            70.4%
            
            $1.75
            
            23.7%
            
            $0.54
            
            5.9%
            
            $6.15





The
generation mix for 2009 is expected to be 63.7% coal, 25.6% nuclear and 10.7%
gas and oil.  Due to locally available natural gas and oil supplies,
the utilization of locally available coal deposits and the generally adequate
supply of nuclear fuel, PNM believes that adequate sources of fuel are available
for its generating stations into the foreseeable future.  See Sources
of Power - PNM - PPAs for information concerning the cost of purchased
power.










A-8


Coal
 
 See Note
16 for information about PNM’s coal supply.





The
natural gas used as fuel for the electric generating plants is procured on the
open market and delivered by third party transportation providers and PNM Gas
(through January 29, 2009 and thereafter by NMGC) through its transportation
facilities.





Nuclear
Fuel





PNM is
one of several participants in PVNGS. See Note 14.  The fuel cycle for
PVNGS is comprised of the following stages:





·
            mining
      and milling of uranium ore to produce uranium
  concentrates;


·
            conversion
      of uranium concentrates to uranium
hexafluoride;


·
            enrichment
      of uranium hexafluoride;


·
            fabrication
      of fuel assemblies;


·
            utilization
      of fuel assemblies in reactors; and


·
            storage
      and disposal of spent nuclear fuel.





The PVNGS
participants are continually identifying their future resource needs and
negotiating arrangements to fill those needs.  The PVNGS participants
have contracted for all of PVNGS’s requirements for uranium concentrates and
conversion services through 2011.  The participants have also
contracted for all of PVNGS’s enrichment services through 2013 and all of
PVNGS’s fuel assembly fabrication services until at least 2015.





Water
Supply





See Note
16 for information about PNM's water supply.





RATES
AND REGULATION





The items
below describe certain of the more significant rate and regulatory matters that
are relevant to the Company.  See Notes 16 and 17 for a discussion of
additional rate and regulatory matters.





PNMR





First
Choice





First
Choice is a member of ERCOT, the ISO responsible for maintaining reliable
operations of the bulk electric power grid in the Texas deregulated electricity
market.  ERCOT does not operate a centrally dispatched pool and does
not procure energy on behalf of its members other than to maintain the reliable
operation of the transmission system.  ERCOT also serves as a
clearinghouse for procuring ancillary services.





Members
of ERCOT include independent REPs, investor owned utilities, municipals,
cooperatives, independent generators, independent power marketers, and
consumers.  The electric market served by ERCOT operates under the
reliability standards set by the North American Electric Reliability
Council.  The PUCT has primary jurisdictional authority over the
electric market served by ERCOT and the reliability of electricity across Texas'
main interconnected power grid.








First
Choice provides energy to retail customers in ERCOT.  As a result of
the deregulated electricity market in Texas, there are no provisions for the
specific recovery of fuel and purchased power costs by First
Choice.  The rates charged to new customers acquired by First Choice
are not regulated by the PUCT, but are negotiated by First Choice with each
customer.  As a result, purchased power costs will affect First
Choice’s operating results.








A-9


PNM





Regulation












Operations
Transferred from TNMP





In
connection with obtaining the approval of the NMPRC for PNMR’s acquisition of
TNP, including TNMP, PNMR agreed to reduce rates for TNMP’s New Mexico
customers, except one large industrial customer, by 1.851 cents per KWh in 2006
through 2007, by an additional 0.1 cents per KWh in 2008, and by a further 0.1
cents per KWh in 2009. No rate increase can be requested that would go into
effect prior to January 1, 2011.  Effective January 1, 2007, the
New Mexico utility operations of TNMP were transferred to PNM and these
provisions regarding rates remain in effect.





Renewable
Portfolio Standard





The
Renewable Energy Act of 2004 was enacted to encourage the development of
renewable energy in New Mexico.  The act establishes a mandatory
renewable energy portfolio standard requiring a utility to acquire a renewable
energy portfolio equal to 5% of retail electric sales by January 1, 2006 and, as
amended effective July 1, 2007, increasing to 10% by 2011, 15% by 2015 and 20%
by 2020.  The act provides for streamlined proceedings for approval of
utilities’ renewable energy procurement plans, assures utilities recovery of
costs incurred consistent with approved procurement plans and requires the NMPRC
to establish a reasonable cost threshold for the procurement of renewable
resources to prevent excessive costs being added to rates.





TNMP





Regulation





In Texas,
TNMP provides regulated transmission and distribution services and is subject to
the jurisdiction of the PUCT and certain municipalities with respect to rates
and service.  TNMP is subject to traditional cost-of-service
regulation in Texas.  TNMP’s transmission and distribution activities
in Texas are not subject to FERC regulation, because those activities occur
solely within the ERCOT system of Texas.





In August
2008, TNMP filed with the PUCT for an $8.7 million increase in
revenues.  The rate case is currently being held in abatement, pending
the final determination of the costs related to Hurricane Ike, as well as
anticipated debt financing costs to be included in rates charged to
customers.  See Note 17.





ENVIRONMENTAL
MATTERS





Electric
and gas utilities are subject to stringent laws and regulations for protection
of the environment by local, state, federal and tribal authorities. In addition,
PVNGS is subject to the jurisdiction of the NRC, which has the authority to
issue permits and licenses and to regulate nuclear facilities in order to
protect the health and safety of the public from radioactive hazards and to
conduct environmental reviews pursuant to the National Environmental Policy
Act.  The liabilities under these laws and regulations can be material
and, in some instances, may be imposed without regard to fault, or may be
imposed for past acts, whether or not such acts were lawful at the time they
occurred.  See MD&A - Critical Accounting Policies for a
discussion of applicable accounting policies and – Other Issues Facing the
Company – Climate Change Issues for information on greenhouse gas
emissions.  In addition, see Notes 16 and 18 for information related
to the following matters, incorporated in this item by reference.






A-10


Note
16
 ·
              Renewable
      Portfolio Standard
 ·
              PVNGS
      Decommissioning Funding
 ·
              Nuclear
      Spent Fuel and Waste Disposal


·
            Environmental
      Matters under the caption “The Clean Air
Act”


·
            Santa
      Fe Generating Station


·
            Coal
      Combustion Waste Disposal


·
            Gila
      River Indian Reservation Superfund
Site





Note
18


·
            Environmental
      Issues





COMPETITION





Through
certain of its subsidiaries, PNMR is a merchant utility and a regulated energy
service provider.  Regulated utilities are generally not subject to
competition from other utilities in areas that are under the jurisdiction of
state regulatory commissions.  In New Mexico, PNM does not have
competition for services provided to its retail electric
customers.  In Texas, TNMP is not currently in any direct retail
competition with any other regulated electric utility.  However, the
Company is subject to customer conservation activities and initiatives to
utilize alternative energy sources.  As a merchant utility, PNMR is
subject to competition in the wholesale markets and the deregulated electricity
market in Texas.  Additional information relating to the competitive
environment in which the Company operates in is contained in
MD&A.





The
Company is subject to varying degrees of competition in certain territories
adjacent to or within the areas it serves with other utilities in its region as
well as with rural electric cooperatives and municipal utilities.  The
Company is involved in the generation and sale of electricity into the wholesale
market.  It is subject to competition from regional utilities with similar
opportunities to generate and sell energy at market-based prices and larger
trading entities that do not own or operate generating assets.   The
Texas electricity market has been open to retail competition since 2002. 
The Company is exposed to competition in the unregulated Texas retail
electricity market through First Choice, which serves customers at competitive
rates.  In order to compete effectively in the Texas retail electricity
market, First Choice must be able to attract and retain customers on the basis
of cost and service, while managing the cost of its energy
supply.





Since
2002, electric consumers in Texas have been encouraged to switch from their
traditional retail energy provider, such as TNMP, to a competitive REP, such as
First Choice.  Currently under TECA, consumers whose chosen retail energy
provider has exited the Texas market are provided electric service by a
“provider of last resort.”  Rates of the provider of last resort are
regulated by the PUCT and are fixed for the two-year period that each provider
of last resort serves.  First Choice Power and other REPs, formerly subject
to price-to-beat rates, currently market retail electricity at competitive
rates, which has resulted in increased pressure on margins.





A-11


EMPLOYEES





The
following table sets forth the number of employees of PNMR, PNM and TNMP and for
each business segment as of December 31, 2008:





PNMR
            
            
            PNM
            
            
            TNMPCorporate
      *
            
            
            624
            
            
            
            -
            
            
            
            -PNM
      Electric
            
            
            1,135
            
            
            
            1,135
            
            
            
            -TNMP
      Electric
            
            
            348
            
            
            
            -
            
            
            
            348PNM
      Gas
            
            
            681
            
            
            
            681
            
            
            
            -First
      Choice
            
            
            76
            
            
            
            -
            
            
            
            -Total
            
            
            2,864
            
            
            
            1,
      816
            
            
            
            348





*   Represents
employees of PNMR Services Company.





TNMP does
not have any employees that are represented by unions.  The following
table sets forth the number of employees of PNMR and PNM, by business segment,
represented by unions as of December 31, 2008:





PNMR
            
            
            PNMPNM
      Electric
            
            
            677
            
            
            
            677PNM
      Gas
            
            
            260
            
            
            
            260Total
            
            
            937
            
            
            
            937





PNM
Electric has 587 employees in its power plant and operations areas that are
currently covered by a collective bargaining agreement with the IBEW that
expires April 30, 2009.  Negotiations for a successor
agreement began in February 2009.  It is anticipated that the
successor agreement would cover approximately 90 additional employees, meter
readers and collectors who voted for IBEW representation in 2008.  PNM
Gas employees were represented by the United Association of Pipefitters and the
IBEW. These gas employees became employed by NMGC on January 30, 2009. While the
Company is optimistic that a timely agreement on a successor agreement will
be reached, PNM cannot, at this time, predict the outcome of the
negotiations.  The salaries and benefits for all PNM employees who are
members of the IBEW are typically included in the rates charged to electric
customers, subject to approval of the NMPRC.





Not all
of the Company’s business segments are separate legal entities.  The
employees disclosed in the tables above for PNM Electric and PNM Gas are
allocated, in part, in a manner consistent with the allocation of labor costs to
those segments.  On January 30, 2009, PNM completed the sale of PNM
Gas.  See Note 23.





DISCLOSURE
REGARDING FORWARD LOOKING STATEMENTS





Statements
made in this filing that relate to future events or PNMR’s, PNM’s or TNMP’s
expectations, projections, estimates, intentions, goals, targets and strategies,
are made pursuant to the Private Securities Litigation Reform Act of
1995.  Readers are cautioned that all forward-looking statements are
based upon current expectations and estimates and PNMR, PNM and TNMP assume no
obligation to update this information.





Because
actual results may differ materially from those expressed or implied by these
forward-looking statements, PNMR, PNM and TNMP caution readers not to place
undue reliance on these statements.  PNMR’s, PNM’s and TNMP’s
business, financial condition, cash flow and operating results are influenced by
many factors, which are often beyond their control, that can cause actual
results to differ from those expressed or implied by the forward-looking
statements.  These factors include:





·
            Conditions
      affecting the Company’s ability to access the financial markets or Optim
      Energy’s access to additional debt financing following the utilization of
      its existing credit facility, including actions by ratings agencies
      affecting the Company’s credit
ratings,


·
            The
      recession and its consequent extreme disruption in the credit
      markets,


·
            State
      and federal regulatory and legislative decisions and actions, including
      the PNM and TNMP electric rate cases filed in 2008, and appeals of prior
      regulatory proceedings,


·
            The
      performance of generating units, including PVNGS, SJGS, Four Corners, and
      Optim Energy




A-12




generating
      units, and transmission systems,·
            The
      risk that Optim Energy is unable to identify and implement profitable
      acquisitions, including development of the Cedar Bayou Generating Station
      Unit 4, or that PNMR and ECJV will not agree to make additional capital
      contributions to Optim Energy,


·
            The
      potential unavailability of cash from PNMR’s subsidiaries or Optim Energy
      due to regulatory, statutory or contractual
  restrictions,


·
            The
      impacts of the decline in the values of marketable equity securities on
      the trust funds maintained to provide nuclear decommissioning funding and
      pension and other postretirement benefits, including the levels of funding
      and expense,


·
            The
      ability of First Choice to attract and retain customers and collect
      amounts billed,


·
            Changes
      in ERCOT protocols,


·
            Changes
      in the cost of power acquired by First
Choice,


·
            Collections
      experience,


·
            Insurance
      coverage available for claims made in
  litigation,


·
            Fluctuations
      in interest rates,


·
            Weather,


·
            Water
      supply,


·
            Changes
      in fuel costs,


·
            The
      risk that PNM Electric may incur fuel and purchased power costs that
      exceed the cap allowed under its Emergency
  FPPAC,


·
            Availability
      of fuel supplies,


·
            The
      effectiveness of risk management and commodity risk
      transactions,


·
            Seasonality
      and other changes in supply and demand in the market for electric
      power,


·
            Variability
      of wholesale power prices and natural gas
  prices,


·
            Volatility
      and liquidity in the wholesale power markets and the natural gas
      markets,


·
            Uncertainty
      regarding the ongoing validity of government programs for emission
      allowances,


·
            Changes
      in the competitive environment in the electric
  industry,


·
            The
      risk that the Company and Optim Energy may have to commit to substantial
      capital investments and additional operating costs to comply with new
      environmental control requirements including possible future requirements
      to address concerns about global climate
change,


·
            The
      risks associated with completion of generation, including pollution
      control equipment at SJGS, and the Optim Energy Cedar Bayou Generating
      Station Unit 4, transmission, distribution, and other projects, including
      construction delays and unanticipated cost
  overruns,


·
            The
      outcome of legal proceedings,


·
            Changes
      in applicable accounting principles,
and


·
            The
      performance of state, regional, and national
  economies.





See Item
7A. Quantitative and Qualitative Disclosure About Market Risk for information
about the risks associated with the use of derivative financial
instruments.





SECURITIES
ACT DISCLAIMER





Certain
securities described in this report have not been registered under the
Securities Act of 1933, as amended, or any state securities laws and may not be
reoffered or sold in the United States absent registration or an applicable
exemption from the registration requirements of the Securities Act of 1933 and
applicable state securities laws.  This Form 10-K does not constitute
an offer to sell or the solicitation of an offer to buy any
securities.





ITEM
1A.                      RISK
FACTORS





The
business and financial results of PNMR, PNM and TNMP are subject to a number of
risks and uncertainties, including those set forth below and in MD&A, Note
16 and Note 17.  Optim Energy, which is 50% owned by PNMR, is subject
to many of the same risks and uncertainties.





The
economic recession and its consequent extreme disruption in the credit markets
may impact our growth strategy and ability to raise capital.




A-13


There
currently exists what has been characterized as a “credit crisis” in the United
States.  PNMR and its operating subsidiaries rely on access to both
short-term money markets and longer-term capital markets as a source of
liquidity for any capital requirements not satisfied by the cash flow from
operations, which could include capital requirements for energy infrastructure
investments and funding new projects.  If PNMR, its operating
subsidiaries, or Optim Energy are not able to access capital at competitive
rates, or at all, PNMR’s ability to finance capital requirements, if needed, and
its ability to implement its growth strategy will be
limited.  Disruptions in the credit markets which could negatively
impact our access to capital could be caused by:





·
            a
      further or prolonged economic
recession,


·
            declines
      in the health of the banking sector generally, and the failure of specific
      banks who are parties to our credit
facilities,


·
            the
      bankruptcy of an unrelated energy
company,


·
            increased
      market prices for electricity and
gas,


·
            terrorist
      attacks or threatened attacks on facilities of PNMR’s operating
      subsidiaries or those of unrelated energy companies,
  and


·
            deterioration
      in the overall health of the utility
industry.





Market
disruptions may increase the cost of borrowing or adversely affect our ability
to raise capital through the issuance of securities or other borrowing
arrangements, which could have a material adverse effect on business, financial
position, results of operations and liquidity.




Additionally,
the recession may affect the actions of our customers and result in decreased
consumption and increased bad debt expense, and could also negatively impact our
suppliers, all of which could negatively impact us.




In addition to affecting the capital
markets generally, the recession indicates an overall reduction in the level of
economic activity.  Decreased economic activity can lead to declines
in energy consumption, which could adversely affect future revenues, earnings
and growth.  Rises in unemployment rates both inside our service
territories and nationwide could result in commercial customers ceasing
operations and lower levels of income for our residential customers, causing
them to be unable to pay their bills on time, which could impact our cash flows
and increase our bad debt expense, which will impact results of
operations.  For example, First Choice experienced an increase of $36.7
million in bad debt expense in 2008 compared to 2007. Decreased consumption,
late or absence of payments and increases in bad debt expense would all
negatively impact our results.





Economic conditions also impact the
supply of commodities and materials needed to construct or acquire utility
assets or make necessary repairs.  The recession may affect the supply
of concrete, copper, steel, and aluminum.  The costs of those items
are also affected by economic conditions and could increase significantly over
forecasted amounts.




Declines
in values of marketable securities held in trust funds for pension and other
postretirement benefits and in the NDT could result in sustained increases in
costs and funding requirements for those obligations, which may affect our
results of operations.





The
Company targets 57.5% of its pension trust funds and 70.0% of its trust funds
for other postretirement benefits to be invested in marketable equity
securities.  There has been a significant decline in the general price
levels of marketable equity securities in the second half of 2008 and early
2009. It is likely that increased levels of funding will be required and
additional amounts will be recorded as expense. Also, a significant portion of
funds held in the NDT are invested in marketable equity
securities.  The declines in market values have resulted in the
recognition of losses as impairments of the certain securities held in the NDT
and further declines in market value could result in additional
impairments.





A-14




Any
failure to meet our debt obligations could harm our business, financial
condition and results of operations.




As of
February 20, 2009, the Company had consolidated short-term debt outstanding of
$472.7 million.  Included in this amount are the TNMP Bridge Facility,
which expires on March 30, 2009 and had an outstanding balance of $100.0
million, and the TNMP Facility, which expires May 13, 2009 and had an
outstanding balance of $150.0 million.  The TNMP facilities will need
to be paid or refinanced at their maturities.  In addition, prior to
February 20, 2010, the Company has long-term debt aggregating $36.0 million,
consisting of PNM’s 4.0% unsecured PCRBs, which are subject to a mandatory
repurchase and remarketing on July 1, 2009.




The
Company is exploring financial alternatives to meet these obligations at their
maturities and currently believes that internal cash generation, credit
arrangements, and access to the public and private capital markets will provide
sufficient resources to meet capital requirements and retire or refinance the
debt described above at maturity.  To cover the difference in the
amounts and timing of cash generation and cash requirements, the Company intends
to use short-term borrowings under current liquidity arrangements.




If our
cash flow and capital resources are insufficient to fund our debt obligations,
we may be forced to sell assets, seek additional equity or debt capital or
restructure our debt.  In addition, any failure to make scheduled
payments of interest and principal on our outstanding indebtedness would likely
result in reductions of our credit ratings, which could harm our ability to
incur additional indebtedness on acceptable terms and would result in an
increase in the interest rates applicable under our credit
facilities.  Our cash flow and capital resources may be insufficient
to pay interest and principal on our debt in the future.  If that
should occur, our capital raising or debt restructuring measures may be
unsuccessful or inadequate to meet our scheduled debt service obligations, which
could cause us to default on our obligations and further impair our
liquidity.




Future
reduction in the credit ratings of PNMR or its operating subsidiaries could
materially and adversely affect their business, financial position, results of
operations and liquidity.





The
credit ratings for the debt of PNMR, PNM, and TNMP were downgraded in April and
May 2008 and in some instances are below investment grade.  PNMR, PNM
and TNMP cannot be sure that any of their current ratings will remain in effect
for any given period of time or that a rating will not be lowered or withdrawn
entirely by a rating agency.  Any downgrade could result
in:





·
            increased
      borrowing costs, which would diminish financial
  results,


·
            required
      payment of a higher interest rate in future financings and a smaller
      potential pool of investors and  decreased funding
      sources,


·
            required
      provision of additional support in the form of letters of credit or cash
      or other collateral to various counterparties,
  and


·
            limited
      access to or increased costs of access to the commercial paper and other
      credit markets.





The
outcomes of the pending electric rate cases for PNM and TNMP and the appeal of
the decision in PNM’s 2007 Electric Rate Case could have a significant impact on
the Company’s future financial condition and results of operations.





Critical
to PNMR’s success for the foreseeable future is the financial health of its
operating subsidiaries. The outcome of PNM’s 2007 Electric Rate Case and the
Emergency FPPAC are still under appeal before the New Mexico Supreme
Court.  In 2008, each of PNM and TNMP filed electric rate cases. See
Note 17 for additional information. Favorable outcomes of these matters are
critical to PNM’s and TNMP’s financial health.





PNMR,
including Optim Energy, may fail to successfully achieve the anticipated
benefits from current or future business development initiatives, joint ventures
and acquisitions.





PNMR may
from time to time pursue business development and acquisition
opportunities.  Although PNMR’s approach would be disciplined and
would identify anticipated benefits, potential synergies, cost savings, and
growth opportunities prior to entering into business initiatives and prior to
the acquisition and integration of acquired companies or assets, PNMR may not be
able to achieve these anticipated benefits and actual results may differ
materially from anticipated benefits due to, among other things:




A-15




·
            delays
      or difficulties in completing the integration of acquired companies or
      assets,


·
            higher
      than expected costs or a need to allocate resources to manage unexpected
      operating difficulties,


·
            diversion
      of the attention and resources of its
  management,


·
            reliance
      on inaccurate assumptions in evaluating the expected benefits of a given
      business initiative, joint venture or
  acquisition,


·
            inability
      to retain key employees or key customers of business initiatives, joint
      ventures or acquired companies, and


·
            assumption
      of liabilities unrecognized in the due diligence
  process.





In
addition, PNMR intends to capitalize on the growth opportunities, principally
within the areas of Texas covered by ERCOT through its participation and
ownership in Optim Energy.  In particular, it is anticipated that
Optim Energy will focus on these anticipated business lines:





·
            development,
      operation and ownership of diverse generation assets;
  and


·
            wholesale
      marketing and trading to optimize its assets.





There are
a number of conditions that must be satisfied in order for Optim Energy to
operate successfully.  The parties must agree if cash and/or assets
are proposed to be contributed.  Optim Energy must have adequate
financing to undertake acquisitions and must also receive certain financing
commitments with respect to its proposed ongoing operations. Certain regulatory
approvals may be required in connection with the contributions of the members
and acquisitions.  Although Optim Energy has been established and has
made certain acquisitions, there is no assurance that Optim Energy will be able
to identify and implement profitable acquisitions in the future. There can be no
assurance that these conditions will be satisfied, and PNMR may not realize the
benefits it anticipates from the operation of Optim Energy.





The
financial performance of PNMR, PNM and TNMP may be adversely affected if their
power plants and transmission and distribution system are not successfully
operated. Further, the financial performance of PNMR may be adversely affected
if Optim Energy’s power plants are not successfully operated.





The
financial performance of PNMR, PNM and TNMP, as well as that of Optim Energy,
depends on the successful operation of their generation, transmission and
distribution assets.  Unscheduled or longer than expected maintenance
outages, other performance problems with the electric generation assets, severe
weather conditions, accidents and other catastrophic events, disruptions in the
delivery of fuel and other factors could reduce generation capacity and
therefore limit the ability to sell power. Diminished generation capacity could
also result in PNM’s aggregate net open forward electric sales position,
including its retail load requirements, being larger than forecasted generation
capacity.  If this were to occur, purchases of electricity in the
wholesale market by PNM would be required under contracts priced at the time of
execution or, if in the spot market, at the then-current market
price.  There can be no assurance that sufficient electricity would be
available at reasonable prices, or at all, if such a situation were to occur.
Failures of transmission or distribution facilities may also cause interruptions
in the services that PNM and TNMP provide.  These potential generation,
distribution and transmission problems, and any potentially related service
interruptions, could result in lost revenues and additional costs.





The
financial performance of PNMR and PNM may be adversely affected if PVNGS cannot
be operated at a satisfactory level or if the NRC imposes restrictions on
operation of the plant or any of the three units at PVNGS.  Additional
information relating to the performance of PVNGS is contained in MD&A. See
Sources of Power above.





Demand
for power could exceed supply capacity, resulting in increased costs for
purchasing capacity in the open market or building additional generation
capabilities.





Through
its operating subsidiaries, PNMR is currently obligated to supply power to
retail customers and wholesale customers. At peak times, the demand for power
required to meet this obligation could exceed PNMR’s available generation
capacity. Market or competitive forces may require that PNMR’s operating
subsidiaries purchase capacity on the open market or build additional generation
capabilities. Because regulators or market conditions may not permit the
operating subsidiaries to pass all of these purchase or construction costs on to
their customers, the operating subsidiaries may not be able to recover any of
these costs or may have exposure to regulatory lag associated with the time
between the incurrence of costs of purchased or constructed capacity and the




A-16


recovery
in customers’ rates. These situations could have negative impacts on net income
and cash flows for PNMR and the affected operating subsidiary.





PNMR
and its operating subsidiaries may not be able to mitigate fuel and wholesale
electricity pricing risks, which could result in unanticipated liabilities or
increased volatility in earnings.





The
business and operations of PNMR and its operating subsidiaries are subject to
changes in purchased power prices and fuel costs that may cause increases in the
amounts that must be paid for power supplies on the wholesale market and the
cost of producing power in owned generation plants.  Prices for
electricity, fuel and natural gas may fluctuate substantially over relatively
short periods of time and expose PNMR and its operating subsidiaries to
significant commodity price risks.





Among the
factors that could affect market prices for electricity and fuel
are:





·
            prevailing
      market prices for coal, oil, natural gas, nuclear fuel and other fuels
      used in the generation plants of PNMR and its operating subsidiaries,
      including associated transportation costs, and supplies of such
      commodities,


·
            prevailing
      market conditions in the general wholesale electricity
    market,


·
            liquidity
      in the commodity markets,


·
            the
      rate of growth in electricity as a result of population changes, regional
      economic conditions and the implementation of conservation
      programs,


·
            weather
      conditions impacting demand for electricity or availability of
      hydroelectric power or fuel
supplies,


·
            changes
      in the regulatory framework for the commodities markets that PNMR and its
      operating subsidiaries rely on for purchased power and
    fuel,


·
            the
      actions of external parties, such as FERC or independent system operators,
      that may impose price limitations and other mechanisms to address some of
      the volatility in the United States’ western energy
    markets,


·
            changes
      in federal and state energy and environmental laws and
      regulations,


·
            union
      and labor relations, and


·
            natural
      disasters, wars, embargoes and other catastrophic
  events.





PNMR and
its operating subsidiaries rely on derivatives such as forward contracts,
futures contracts, options and swaps to manage certain risks.  They
attempt to manage their exposure from these activities through enforcement of
established risk limits and risk management procedures.  PNMR and its
operating subsidiaries cannot be certain that these strategies will be
successful in managing pricing risk, or that they will not result in net
liabilities as a result of future volatility in these markets.  To the
extent electric capacity generated by wholesale plants is not under contract to
be sold, the business, results of operations and financial position of PNMR and
its operating subsidiaries will generally be subject to the volatility of
wholesale electricity prices.  To the extent these strategies are not
successful, they could have a material adverse effect on business, financial
position, results of operations and liquidity.





Costs
of environmental compliance, liabilities and litigation could exceed estimates
by PNMR and its operating subsidiaries and Optim Energy, which could adversely
affect their business, financial position, results of operations and
liquidity.  In addition, while there is uncertainty about the timing
and form of anticipated climate change regulation, the regulation of GHG is
expected to have a material impact on operations.





Compliance
with federal, state and local environmental laws and regulations may result in
increased capital, operating and other costs, including remediation and
containment expenses and monitoring obligations.  PNMR, PNM, TNMP and
Optim Energy cannot predict how they would be affected if existing environmental
laws and regulations were revised, or if new environmental laws and regulations
seeking to protect the environment were adopted.  In addition, while
there continues to be significant debate regarding the existence and extent of
the emission of so-called GHG (particularly CO2) from fossil-fired generation
facilities, PNMR and its operating subsidiaries believe that future governmental
regulations applicable to their operations will limit GHG. A number of bills
have been introduced in the U.S. Congress, and under a number of the bills, it
is likely that the incurrence of substantial costs would be required in order to
comply, assuming that technology is available.  Material changes in




A-17


existing
environmental laws and regulations, as well as new environmental laws and
regulations, including the expected regulation of GHG, will increase financing
requirements or otherwise adversely affect the business, financial position,
results of operations and liquidity of PNMR, its operating subsidiaries and
Optim Energy, unless increased environmental costs are recovered in customer
rates or otherwise.  Revised or additional environmental laws and
regulations could also result in additional operating restrictions on facilities
and increased compliance costs that may not be fully recoverable in rates or
otherwise, thereby reducing net income.





In
addition, PNM or TNMP may be designated as a responsible party for environmental
clean up at a site identified by a regulatory body.  PNMR, PNM and
TNMP cannot predict with certainty the amount and timing of all future
expenditures related to environmental matters because of the difficulty of
estimating clean-up and compliance costs, and the possibility that changes will
be made to the current environmental laws and regulations. There is also
uncertainty in quantifying liabilities under environmental laws that impose
joint and several liability on all potentially responsible
parties.  Failure to comply with environmental laws and regulations,
even if caused by factors beyond PNM’s or TNMP’s control, may result in the
assessment of civil or criminal penalties and fines.





PNMR
may be unable to meet its ongoing and future financial obligations and to pay
dividends on its common and convertible preferred stock if its subsidiaries are
unable to repay funds to PNMR or if PNMR’s subsidiaries or Optim Energy are
unable to pay upstream dividends or distributions to PNMR.





PNMR is a
holding company and, as such, PNMR has no operations of its own. PNMR’s ability
to meet its financial obligations and to pay dividends on its common and
convertible preferred stock at the current rate is primarily dependent on the
net income and cash flows of its subsidiaries and Optim Energy and their ability
to pay upstream dividends or distributions or, in the case of PNMR’s
subsidiaries, to repay funds to PNMR. Prior to providing funds to PNMR, PNMR’s
subsidiaries and Optim Energy have financial obligations that must be satisfied,
including among others, debt service and, in the case of PNM, preferred stock
dividends.





PNM can
pay dividends to PNMR from earnings as well as equity contributions made by
PNMR.  The NMPRC has placed certain restrictions on the ability of PNM
to pay dividends to PNMR, including the restriction that PNM cannot pay
dividends that cause its debt rating to fall below investment grade. The NMPRC
has also restricted PNM from paying dividends in any year, as determined on a
rolling four quarter basis, in excess of net earnings, including carryover
amounts, without prior NMPRC approval.  Additionally, PNM has various
financial covenants that limit the transfer of assets, through dividends or
other means.





In
addition, the ability of PNMR to declare dividends is dependent upon the extent
to which cash flows will support dividends, the availability of retained
earnings, the financial circumstances and performance, the NMPRC’s and PUCT’s
decisions in various regulatory cases currently pending and which may be
docketed in the future, the effect of federal regulatory decisions,
Congressional and legislative acts and economic conditions in the United
States.  Conditions imposed by the NMPRC or PUCT, future growth plans
and the related capital requirements and business considerations may also affect
PNMR’s ability to pay dividends.





PNMR,
PNM and TNMP are subject to complex government regulation, which may have a
negative impact on their business, financial position and results of
operations





PNMR, PNM
and TNMP are subject to comprehensive regulation by several federal, state and
local regulatory agencies, which significantly influences their operating
environment and may affect their ability to recover costs from utility
customers. In particular, the NMPRC, PUCT, FERC, NRC, EPA, ERCOT, NMED and TCEQ
regulate many aspects of their utility operations, including siting and
construction of facilities, conditions of service, the issuance of securities,
and the rates that the regulated entities can charge customers. PNMR, PNM and
TNMP are required to have numerous permits, approvals and certificates from
these agencies to operate their business.  The rates that PNM and TNMP
are allowed to charge for their retail services significantly influence PNMR’s
and those subsidiaries’ business, financial position, results of operations and
liquidity.  Due to continuing federal regulatory reforms, the public
utility industry continues to undergo change.  Although Optim Energy’s
operations are generally not subject to regulation by the utility regulatory
agencies, its operations are subject to regulation by other regulators such as
environmental authorities.





The NRC
has broad authority under federal law to impose licensing and safety-related
requirements for the operation of nuclear generation facilities.  In
the event of noncompliance, the NRC has the authority to impose monetary civil
penalties or a progressively increased inspection regime that could ultimately
result in the shut down




A-18


of a
unit, or both, depending upon the NRC’s assessment of the severity of the
situation, until compliance is achieved.  In early 2007, the NRC
placed PVNGS Unit 3 in the “multiple/repetitive degraded cornerstone” column of
the NRC’s Action Matrix (“Column 4”), which has resulted in an enhanced NRC
inspection regime, including on-site in-depth inspections of PVNGS equipment and
operations.  Although only PVNGS Unit 3 is in NRC’s Column 4, in order
to adequately assess the need for improvements, APS management has been
conducting site-wide assessments of equipment and operations.  APS
continues to cooperate fully with the NRC throughout this
process.  The enhanced NRC inspection regime and APS’ ongoing
commitment to the conservatively safe operation of PVNGS could result in NRC
action or an APS decision to shut down one or more units in the event of
noncompliance with operating requirements or in light of other operating
considerations.





Under the
Energy Policy Act of 2005, FERC has issued a number of rules pertaining to
preventing undue discrimination in transmission services and electric
reliability standards.  PNMR monitors and participates in the FERC and
other proceedings involving implementation of the Energy Policy Act, in order to
assess the implications of the law and rules on its operations.





PNMR and
its subsidiaries are unable to predict the impact on their business and
operating results from the future regulatory activities of any agency that
regulates them or from the implementation of the Energy Policy
Act.  Changes in regulations or the imposition of additional
regulations may require PNMR and its regulated subsidiaries to incur additional
expenses or change business operations, and therefore may have an adverse impact
on PNMR’s and those subsidiaries’ results of operations.





The
operating results of PNMR and its operating subsidiaries and Optim Energy are
affected by weather conditions and regional drought and may fluctuate on a
seasonal and quarterly basis.





Electric
power generation and distribution are generally seasonal businesses with demand
for power from PNMR’s and Optim Energy’s electric operations traditionally
peaking during the hot summer months. As a result, the operating results of PNMR
and its operating subsidiaries and Optim Energy will likely fluctuate
substantially on a seasonal basis. In addition, the sale of PNM Gas on January
30, 2009 and the absence of revenues from gas operations for the remainder of
the first quarter of 2009 will likely highlight a change in quarterly earnings
distribution.





In
addition, PNMR and its operating subsidiaries have historically sold less power,
and consequently earned less income, when weather conditions are milder.
Temperature extremes inside an operating subsidiary’s service territory may
reduce the amount of power available to sell on the wholesale market. Unusually
mild weather in the future could reduce the revenues, net earnings, available
cash and borrowing ability of PNMR and its operating subsidiaries.





Drought
conditions in New Mexico generally, and especially in the “four corners” region,
in which SJGS and the Four Corners plant are located, may affect the water
supply for PNM’s generating plants.  If adequate precipitation is not
received in the watershed that supplies that region, PNM may have to decrease
generation at these plants, which would require the purchase of power to serve
PNM’s customers and/or reduce PNM’s ability to sell excess power on the
wholesale market and reduce its revenues.  Drought conditions or
actions taken by regulators or legislators could limit PNM’s supply of water,
and PNM’s and PNMR’s business may be adversely impacted.  Although PNM
has been able to maintain adequate access to water through supplemental
contracts and voluntary shortage sharing agreements with tribes and other water
users in the “four corners” region, PNM cannot be certain that it will be able
to do so in the future.





A-19


The
ability of First Choice to attract and retain customers, its ability to collect
amounts billed to customers, and its ability to mitigate the fluctuation in
costs of energy supply could have a significant adverse effect on PNMR’s
business, financial position, results of operations and liquidity.





PNMR is
exposed to competition in the unregulated Texas retail electricity market
through First Choice, which serves customers at competitive rates.  In
order to compete effectively in the Texas retail electricity market, First
Choice must be able to attract and retain customers on the basis of cost and
service, while managing the cost of its energy supply.  The
competitive nature of the Texas market results in significant turnover in the
customer base of First Choice.  There is no provision under Texas
regulation that requires customers to pay their previous REP before obtaining
service from another REP.  This has been exacerbated by the impacts of
Hurricane Ike and depressed economic conditions and has resulted in significant
increases in the levels of uncollectible accounts and bad debt expense. The
ability of First Choice to compete successfully in the Texas market could have a
significant effect on PNMR’s business, financial position, results of operations
and liquidity.





There
are inherent risks in the ownership and operation of nuclear facilities, such as
environmental, health, regulatory, and financial risks and the risk of a
terrorist attack.





PNM has a
10.2% undivided interest in PVNGS, with portions of its interests in Units 1 and
2 held under leases.  PVNGS is subject to environmental, health and
financial risks such as the ability to dispose of spent nuclear fuel, the
ability to maintain adequate reserves for decommissioning, potential liabilities
arising out of the operation of these facilities and the costs of securing the
facilities against possible terrorist attacks and unscheduled outages due to
equipment and other problems.  PNM maintains nuclear decommissioning trust
funds and external insurance coverage to minimize its financial exposure to some
of these risks; however, it is possible that damages could exceed the amount of
insurance coverage.  See Note 16.  Although the
decommissioning trust funds are designed to provide adequate funds for
decommissioning at the end of the expected life of the PVNGS units, there is the
risk of insufficient decommissioning trust funds in the event of early
decommissioning of the units.





The NRC
has broad authority under federal law to impose licensing and safety-related
requirements for the operation of nuclear generation facilities.  In
the event of noncompliance, the NRC has the authority to impose monetary civil
penalties or a progressively increased inspection regime, which could ultimately
result in the shut down of a unit, or both, depending upon its assessment of the
severity of the situation, until compliance is achieved.  The enhanced
NRC inspection regime currently in effect at PVNGS and the related operational
and regulatory implications are discussed above.  In addition,
although the PVNGS participants have no reason to anticipate a serious nuclear
incident at PVNGS, if an incident did occur, it could materially and adversely
affect the results of operations and financial condition of PNM and
PNMR.  A major incident at a nuclear facility anywhere in the world
could cause the NRC to limit or prohibit the operation or licensing of any
domestic nuclear unit.





The
operation of each of the three PVNGS units requires an operating license from
the NRC.  The NRC issued full power operating licenses for Unit 1 in June
1985, Unit 2 in April 1986 and Unit 3 in November 1987.  The full power
operating licenses are valid for a period of approximately 40 years.  APS,
on behalf of the PVNGS participants, applied for renewed operating licenses for
each unit on December 15, 2008 for a period of 20 years beyond the expirations
of the current licenses.  The NRC is currently reviewing the
application.   The PVNGS participants do not anticipate any
problems renewing these licenses.  However, as a result of potential
terrorist threats and increased public scrutiny of utilities, the licensing
process could result in increased licensing or compliance costs that are
difficult or impossible to predict.





Impairments
of tangible and intangible long-lived assets of PNMR, PNM and TNMP could
adversely affect their business, financial position, liquidity and results of
operations.





PNMR, PNM
and TNMP evaluate their tangible and intangible long-lived assets, including
goodwill and non-amortizing intangible assets, for impairment periodically or
whenever indicators of impairment exist, pursuant to SFAS 142 and SFAS 144. The
market capitalization of PNMR’s common stock was significantly below book value
during 2008, which is an indicator that intangible assets may be impaired. Other
potential impairment indicators could include changing customer purchase
commitments and market share; fluctuating market and commodity prices resulting
from weather patterns; changing fuel costs; increased environmental
regulation;industry
deregulation and other economic and market conditions and trends. In addition,
changes in the ERCOT market in which First Choice operates significantly
impacted its results of operations.  Also, Optim Energy made a
strategic decision not to pursue the Twin Oaks expansion and wrote off its
development rights as an impairment.  After tax impairment losses for




A-20


PNMR, its
consolidated subsidiaries, and PNMR’s share of Optim Energy totaled $212.1
million for the year ended December 31, 2008.





If
further indicators of impairment become evident, further analysis could result
in further charges.  In addition, the impairment analysis already
performed was based on operating results expected to occur in the
future.  If the anticipated future results are not achieved, we may be
required to perform additional assessments that could result in further
impairment charges.  Significant impairments adversely affect
business, financial position, liquidity and results of operations.





PNM’s
PVNGS leases describe certain events, including “Events of Loss” and “Deemed
Loss Events”, the occurrence of which could require PNM to pay the lessors and
the equity investors, in return for the investors' interest in PVNGS, cash in
the amount provided in the leases and assume debt obligations relating to the
PVNGS leases.





The
“Events of Loss” generally relate to casualties, accidents and other events at
PVNGS, including the occurrence of specified nuclear events, which would
severely, adversely affect the ability of the operating agent, APS, to operate,
and the ability of PNM to earn a return on its interests in, PVNGS.  The
“Deemed Loss Events” consist mostly of legal and regulatory changes (such as
issuance by the NRC of specified violation orders, changes in law making the
sale and leaseback transactions illegal, or changes in law making the lessors
liable for nuclear decommissioning obligations). PNM believes that the
probability of such “Events of Loss” or “Deemed Loss Events” occurring is remote
for the following reasons: (1) to a large extent, prevention of “Events of Loss”
and some “Deemed Loss Events” is within the control of the PVNGS participants,
including PNM, and the PVNGS operating agent, through the general PVNGS
operational and safety oversight process and (2) with respect to other “Deemed
Loss Events,” which would involve a significant change in current law and
policy, PNM is unaware of any pending proposals or proposals being considered
for introduction in Congress, or in any state legislative or regulatory body
that, if adopted, would cause any of those events.





Provisions
of PNMR’s organizational documents, as well as several other statutory and
regulatory factors, will limit another party’s ability to acquire PNMR and could
deprive PNMR’s shareholders of the opportunity to gain a takeover premium for
shares of PNMR’s common stock.





PNMR’s
restated articles of incorporation and by-laws include a number of provisions
that may have the effect of discouraging persons from acquiring large blocks of
PNMR’s common stock or delaying or preventing a change in control of PNMR. The
material provisions that may have such an effect include:





·
            authorization
      for the Board to issue PNMR’s preferred stock in series and to fix rights
      and preferences of the series (including, among other things, whether, and
      to what extent, the shares of any series will have voting rights, subject
      to certain limitations, and the extent of the preferences of the shares of
      any series with respect to dividends and other
  matters),


·
            advance
      notice procedures with respect to any proposal other than those adopted or
      recommended by PNMR’s Board, and


·
            provisions
      specifying that only a majority of the Board, the chairman of the Board,
      the president or holders of not less than one-tenth of all of PNMR's
      shares entitled to vote may call a special meeting of
      stockholders.





Under the
New Mexico Public Utility Act, NMPRC approval is required for certain
transactions that may result in PNMR’s change in control or exercise of
control.  Certain acquisitions of PNMR’s outstanding voting securities
would also require FERC approval.








ITEM
      1B.
            UNRESOLVED
      STAFF COMMENTS





None.








A-21


ITEM
      2.
              PROPERTIES
 
 PNMR




The
significant properties owned by PNMR include those owned by PNM and TNMP and are
disclosed below.   A subsidiary of PNMR owns 2.3% of PVNGS Unit 2
that is leased to PNM.





PNM





Electric





PNM’s
owned and leased capacity in electric generating stations in commercial service
as of December 31, 2008 is:





Total
      NetGenerationCapacityType
            
            Name
            
            Location
            
            (MW)Coal
            SJGS (a)
            
            Waterflow,
      New Mexico
            
            765Coal
            Four
      Corners (b)
            Fruitland,
      New Mexico
            
            195Gas/Oil
            Reeves
      Station
            Albuquerque,
      New Mexico
            
            154Gas/Oil
            Las
      Vegas (c)
            Las
      Vegas, New Mexico
            
            20Gas/Oil
            Afton
      (combined cycle) (d)
            La
      Mesa, New Mexico
            
            235Gas
            Lordsburg
      (e)
            Lordsburg,
      New Mexico
            
            72Nuclear
            PVNGS
      (f)
            Wintersburg,
      Arizona
            
            402Gas/Oil
            Delta
      (g)
            Albuquerque,
      New Mexico
            
            132Gas/Oil
            Luna
      (combined cycle)  (h)
            Deming,
      New Mexico
            
            190Gas
            Valencia
      (i)
            Belen,
      New Mexico
            
            1482,313





(a)
            SJGS
      Units 1, 2 and 3 are 50% owned by PNM; SJGS Unit 4 is 38.5% owned by
      PNM.


(b)
            Four
      Corners Units 4 and 5 are 13% owned by PNM.  Units 4 and 5 at
      Four Corners are jointly owned with SCE, APS, SRP, Tucson and EPE and are
      operated by APS.  PNM has no ownership interest in Four Corners
      Units 1, 2 or 3.


(c)
            PNM
      will seek NMPRC approval for the June 1, 2012 abandonment of the Las Vegas
      Generating Station.


(d)
            In
      2007, PNM completed the conversion of Afton to a combined cycle plant,
      with 50% of Afton's capacity designated to serve TNMP's New Mexico
      customers, which were transferred to PNM effective January 1, 2007, and
      the other 50% designated to serve PNM's remaining regulated
      customers.


(e)
            PNM’s
      Lordsburg plant was built to serve wholesale customers and other sales
      rather than New Mexico retail customers and therefore, is not currently
      included in the retail rates.  PNM is proposing to include this
      resource in rates charged to New Mexico retail customers beginning with
      the 2008 Electric Rate Case.  See Note
  17.


(f)
            PNM
      is entitled to 10.2% of the power and energy generated by
      PVNGS.  PNM has ownership interests of 2.3% in Unit 1, 2.3% in
      Unit 2 and 10.2% in Unit 3 and has leasehold interests of 7.9% in Unit 1
      and 7.9% in Unit 2.  Of the leased portion of Unit 2, 2.3% is
      owned by a subsidiary of PNMR.


(g)
            PNM
      is entitled to the energy and capacity of Delta under a PPA that is deemed
      to be an operating lease.


(h)
            PNM
      owns 33.3% of Luna.  Currently, Luna is not included in retail
      rates.  Luna’s power is being sold into the wholesale
      market.  PNM has proposed to include this resource in rates
      charged to New Mexico retail customers beginning with the 2008 Electric
      Rate Case.  See Note 17.(i)
            PNM
      has a PPA that entitles it to the entire output of
      Valencia.  Currently, Valencia is not included in retail
      rates.  Valencia’s power is being sold into the wholesale
      market.  PNM has proposed
      to include this resource in rates charged to New Mexico retail customers
      through the






A-22


Emergency FPPAC and the 2008
Electric Rate Case.  Valencia is a variable interest entity and is
consolidated
by PNM as required by FIN 46R.  Therefore, Valencia is reflected in
the above table as if it were owned.  See Sources of Power above and
Note 9 and Note 17.




Fossil-Fueled
Plants





SJGS is
located in northwestern New Mexico, and consists of four units operated by PNM.
Units 1, 2, 3 and 4 at SJGS have net rated capacities of 328 MW, 316 MW, 496 MW
and 506 MW.  SJGS Units 1 and 2 are owned on a 50% shared basis with
Tucson.  SJGS Unit 3 is owned 50% by PNM, 41.8% by SCPPA and 8.2% by
Tri-State.  SJGS Unit 4 is owned 38.457% by PNM, 28.8% by M-S-R Public Power Agency,
10.04% by the City of Anaheim, California, 8.475% by the City of Farmington, New
Mexico, 7.2% by the County of Los Alamos, New Mexico and 7.028% by
UAMPS.





Four
Corners and a portion of the facilities adjacent to SJGS are located on land
held under easements from the United States and also under leases from the
Navajo Nation.  The easement and lease for Four Corners expire in
2016.  The lease contains an option to extend for an additional
25-year period from the end of the existing lease term, for a rental amount tied
to the original rent payment adjusted based on an index.  The easement
does not contain an express renewal option and it is unclear what conditions to
renewal or extension of the easements may be imposed.  The ultimate
cost of renewal of the Four Corners lease and easement is
uncertain.





The power
from Reeves, Lordsburg, Delta, and Valencia is used primarily for peaking and
transmission support.  See Item 1. Business. – Sources of
Power.





Nuclear
Plant





PNM is
participating in the three units of PVNGS, also known as the Arizona Nuclear
Power Project, with APS (the operating agent), Salt River Project, EPE, SCE,
SCPPA and the Department of Water and Power of the City of Los
Angeles.    See Note 16 in the Notes to Consolidated
Financial Statements for information on other PVNGS matters.





Transmission and
Distribution





As of
December 31, 2008, PNM owned, jointly owned or leased, 3,165 circuit miles of
electric transmission lines, 6,037 miles of distribution overhead lines, 5,353
cable miles of underground distribution lines (excluding street lighting) and
271 substations.





Gas





As of
December 31, 2008, the natural gas properties consisted primarily of natural gas
transmission and distribution systems.  Provisions for underground
storage by PNM Gas were on a fee for service basis.  The transmission
systems consisted of 1,471 miles of pipe and compression
facilities.  The distribution systems consisted of 13,061 miles of
pipe.  On January 30, 2009, PNM completed the sale of all of its gas
facilities.





Other
Information





PNM’s
electric transmission and distribution lines are generally located within
easements and rights-of-way on public, private and Native American
lands.  PNM leases interests in PVNGS Units 1 and 2 and related
property, Delta, EIP and associated equipment, data processing, communication,
office and other equipment, office space, vehicles and real
estate.  PNM also owns and leases service and office facilities in
Albuquerque and in other areas throughout its service territory.  See
Note 7 and Note 16.





A-23


TNMP





TNMP’s
facilities consist primarily of transmission and distribution facilities located
in its three non-contiguous Texas service areas.  TNMP owned New
Mexico transmission and distribution facilities which are located in southwest
and south central New Mexico, including the cities of Alamogordo, Ruidoso,
Silver City, Lordsburg and surrounding communities until TNMP’s New Mexico
assets were transferred to PNM on January 1, 2007.  TNMP also owns and
leases service and office facilities in other areas throughout its service
territory.





As of
December 31, 2008, TNMP owned 958 circuit miles of overhead electric
transmission lines, 7,104 pole miles of overhead distribution lines, 1,685
circuit miles of underground distribution lines, and 103
substations.





ITEM
      3.
            LEGAL
      PROCEEDINGS





See Note
16 and Note 17 for information related to the following matters for PNMR, PNM
and TNMP, incorporated in this item by reference.





·
            Citizen
      Suit Under the Clean Air Act


·
            Navajo
      Nation Environmental Issues


·
            Four
      Corners Federal Implementation Plan
Litigation


·
            Santa
      Fe Generating Station


·
            Gila
      River Indian Reservation Super Fund
Site


·
            PVNGS
      Water Supply Litigation


·
            San
      Juan River Adjudication


·
            Western
      United States Wholesale Power
Market


·
            PNM
      – 2007 Electric Rate Case


·
            PNM
      – Emergency FPPAC


·
            TNMP
      Competitive Transition Charge True-Up
Proceeding





ITEM
      4.
            SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY
HOLDERS





None.





SUPPLEMENTAL
ITEM - EXECUTIVE OFFICERS OF PNM RESOURCES, INC.





All
officers are elected annually by the Board of PNMR.  Executive
officers, their ages as of February 20, 2009 and offices held with PNMR for the
past five years, or other companies if less than five years with PNMR, are as
follows:





Name
            Age
            Office
            Initial Effective DateJ.
      E. Sterba
            53
            Chairman
      and Chief Executive Officer
            August
      2008Chairman,
      President and Chief Executive Officer
            August
      2001P.
      K. Collawn
            50
            President
      and Chief Operating Officer
            August
      2008President,
      Utilities
            June
      2007President
      and CEO - Public Service Company of
            October
      2005Colorado,
      Xcel EnergyPresident,
      Customer and Field Operations, Xcel Energy
            July
      2003C.
      N. Eldred
            55
            Executive
      Vice President and ChiefFinancial
      Officer
            July
      2007Senior
      Vice President and Chief Financial Officer
            January
      2006Vice
      President and Chief Financial Officer,Omaha
      Public Power District
            November
      1999






A-24


A.
      A. Cobb
              61
              Senior
      Vice President and Chief Administrative Officer
              June
      2005Senior
      Vice President, Peoples Services and


Development
            December
      2001P.
      T. Ortiz
            59
            Senior
      Vice President, General Counsel and Secretary
            September
      2007Senior
      Vice President and General Counsel
            June
      2005Senior
      Vice President, General Counsel and Secretary
            December
      2001E.
      J. Ferland
            42
            Senior
      Vice President, Utility Operations
            May
      2007Vice
      President of Global Nuclear Field Services
            September
      2006WestinghousePresident
      and CEO, Louisiana Energy Services
            October
      2003T.
      G. Sategna
            55
            Vice
      President and Corporate Controller
            October
      2003








PART
II





ITEM 5.
            MARKET FOR THE COMPANY’S COMMON
      EQUITY, RELATED


STOCKHOLDER MATTERS
      AND ISSUER PURCHASES OF EQUITY
SECURITIES





PNMR’s
common stock is traded on the New York Stock Exchange (Symbol:
PNM).  Ranges of sales prices of PNMR’s common stock, reported as
composite transactions, and dividends declared on the common stock for 2008 and
2007, by quarters, are as follows:





Quarter
      Ended
            
            Range
      of
              Sales
      Prices
            
            DividendsHigh
            
            Low
            
            Per
      Share2008March 31
            $
      21.69
            
            $   8.95
            
            $
      0.230June 30
            $
      15.52
            
            $
      11.32
            
            $
      0.125September 30
            $
      13.06
            
            $   9.88
            
            $
      0.125December 31
            $
      10.95
            
            $   7.56
            
            $
      0.125Fiscal Year
            $
      21.69
            
            $   7.56
            
            $
      0.6052007March 31
            $
      32.70
            
            $   29.32
            
            $
      0.230June 30
            $
      34.28
            
            $   26.50
            
            $
      0.230September 30
            $
      28.71
            
            $   21.05
            
            $
      0.230December 31
            $
      25.21
            
            $   21.41
            
            $
      0.230Fiscal Year
            $
      34.28
            
            $   21.05
            
            $
      0.920





Dividends
on PNMR’s common stock are declared by its Board.  The timing of the
declaration of dividends is dependent on the timing of meetings and other
actions of the Board.  This has historically resulted in dividends
considered to be attributable to the second quarter of each year being declared
through actions of the Board during the third quarter of the
year.  The Board declared dividends on common stock considered to be
for the second quarter of $0.23 per share in July 2007 and $0.125 per share in
August 2008, which are reflected as being in the second quarter
above.  The Board declared dividends on common stock considered to be
for the third quarter of $0.23 per share in September 2007 and $0.125 per share
in September 2008, which are reflected as being in the third quarter
above.  The dividend of $0.125 per share common stock declared by the
Board on August 11, 2008 represents a reduction of 46 percent from the previous
quarter. PNMR’s indicated annual dividend rate is $0.50 per share. The Board
took this action to improve the Company’s liquidity and set a new foundation for
long-term value creation.  The reduction also better aligns PNMR’s
dividend yield with industry averages.   On December 9, 2008 and
February 17, 2009, the Board declared quarterly dividends of $0.125 per
share.  PNMR targets a payout ratio of 50% to 60% of consolidated
earnings.Beginning
with the dividend declared on December 9, 2008, the Series A convertible
preferred stock is entitled to receive dividends equivalent to any dividends
paid on PNMR common stock


A-25


as if the
preferred stock had been converted into common stock.




On
February 20, 2009, there were 12,945 holders of record of PNMR’s common
stock.





See Note
5 for a discussion on limitations on the payments of dividends and the payment
of future dividends, as well as dividends paid by PNM and TNMP.





See Part
III. Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.





Cumulative
Preferred Stock





PNMR and
PNM are not aware of any active trading market for their preferred
stock.  Quarterly cash dividends were paid on PNM’s outstanding
cumulative preferred stock at the stated rates during 2008 and
2007.  Holders of PNMR’s convertible preferred stock, which was issued
in November 2008, receive dividend payments that are equivalent to the dividends
that would have been received on the number of shares of common stock into which
the preferred stock was convertible.  TNMP does not have any
cumulative preferred stock outstanding.





Sales
of Unregistered Securities





None
other than as previously reported on Form 8-K.





A-26


ITEM
6.                      SELECTED
FINANCIAL DATA





The
selected financial data and comparative operating statistics for PNMR should be
read in conjunction with the Consolidated Financial Statements and Notes thereto
and Management’s Discussion and Analysis of Financial Condition and Results of
Operation.  All references to numbers of shares outstanding and per
share amounts have been restated to reflect the 3-for-2 stock split that
occurred on June 11, 2004.  PNMR results include TNP results, which
are included from the date of acquisition on June 6, 2005.  PNMR
results also include results for the Twin Oaks business from the date of
acquisition on April 18, 2006 through May 31, 2007, when it was contributed to
Optim Energy.  On January 30, 2009, PNM completed the sale of its gas
operations, which are considered discontinued operations and excluded from
continuing operations information in the table below.


PNM
RESOURCES, INC. AND SUBSIDIARIES





2008
            
            
            2007
            
            
            2006
            
            
            2005
            
            
            2004Total
      Operating Revenues from Continuing Operations
            
            $
            1,959,522
            
            
            $
            1,914,029
            
            
            $
            1,963,360
            
            
            $
            1,566,110
            
            
            $
            1,113,871Earnings
      (Loss) from Continuing Operations
            
            $
            (305,272
            )
            
            $
            59,358
            
            
            $
            107,960
            
            
            $
            51,133
            
            
            $
            68,908Net
      Earnings (Loss)
            
            $
            (270,644
            )
            
            $
            74,874
            
            
            $
            120,818
            
            
            $
            65,931
            
            
            $
            86,390Earnings
      (Loss) from Continuing Operations per Common ShareBasic
            
            $
            (3.66
            )
            
            $
            0.77
            
            
            $
            1.55
            
            
            $
            0.78
            
            
            $
            1.14Diluted
            
            $
            (3.66
            )
            
            $
            0.76
            
            
            $
            1.53
            
            
            $
            0.76
            
            
            $
            1.12Net
      Earnings (Loss) per Common ShareBasic
            
            $
            (3.24
            )
            
            $
            0.98
            
            
            $
            1.73
            
            
            $
            1.00
            
            
            $
            1.43Diluted
            
            $
            (3.24
            )
            
            $
            0.96
            
            
            $
            1.71
            
            
            $
            0.98
            
            
            $
            1.41Cash
      Flow DataNet
      cash flows from operating activities
            
            $
            88,097
            
            
            $
            222,533
            
            
            $
            244,424
            
            
            $
            210,108
            
            
            $
            235,142Net
      cash flows from investing activities
            
            $
            (320,715
            )
            
            $
            (73,531
            )
            
            $
            (799,575
            )
            
            $
            (154,300
            )
            
            $
            (143,838
            )Net
      cash flows from financing activities
            
            $
            355,471
            
            
            $
            (254,630
            )
            
            $
            610,371
            
            
            $
            (4,804
            )
            
            $
            (86,803
            )Total
      Assets
            
            $
            6,147,982
            
            
            $
            5,872,136
            
            
            $
            6,230,834
            
            
            $
            5,124,709
            
            
            $
            3,487,635Long-Term
      Debt, including current installments
            
            $
            1,584,705
            
            
            $
            1,681,078
            
            
            $
            1,769,205
            
            
            $
            1,746,395
            
            
            $
            987,823Common
      Stock DataMarket
      price per common share at year end
            
            $
            10.08
            
            
            $
            21.45
            
            
            $
            31.10
            
            
            $
            24.49
            
            
            $
            25.29Book
      value per common share at year end
            
            $
            19.13
            
            
            $
            22.03
            
            
            $
            22.24
            
            
            $
            18.89
            
            
            $
            18.42Tangible
      book value per share at year end
            
            $
            15.31
            
            
            $
            14.59
            
            
            $
            14.44
            
            
            $
            10.49
            
            
            $
            18.42Average
      number of common shares outstanding
            
            
            83,468
            
            
            
            76,719
            
            
            
            69,829
            
            
            
            65,928
            
            
            
            60,414Dividends
      declared per common share
            
            $
            0.605
            
            
            $
            0.920
            
            
            $
            0.880
            
            
            $
            0.785
            
            
            $
            0.665Return
      on average common equity
            
            
            (16.0
            )
      %
            
            
            4.4
            %
            
            
            8.0
            %
            
            
            5.5
            %
            
            
            7.8
            %CapitalizationCommon
      stockholders’ equity
            
            
            49.3
            %
            
            
            50.0
            %
            
            
            49.0
            %
            
            
            42.5
            %
            
            
            52.7
            %Convertible
      preferred stock
            
            
            3.0
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Preferred
      stock of subsidiary, without mandatory redemption
              requirements
            
            
            0.3
            
            
            
            0.3
            
            
            
            0.3
            
            
            
            0.4
            
            
            
            0.6Long-term
      debt
            
            
            47.4
            
            
            
            49.7
            
            
            
            50.7
            
            
            
            57.1
            
            
            
            46.7100.0
            %
            
            
            100.0
            %
            
            
            100.0
            %
            
            
            100.0
            %
            
            
            100.0
            %





Note –
The book value per common share at year end, tangible book value per share at
year end, average number of common shares outstanding, and return on average
common equity reflect  the Series A convertible preferred stock as if
it was converted into common stock at the date of its  issuance on
November 17, 2008.


A-27





PNM
      RESOURCES, INC. AND SUBSIDIARIESCOMPARATIVE
      OPERATING STATISTICS2008
            
            
            2007
            
            
            2006
            
            
            2005
            
            
            2004(In
      thousands)PNM
      Electric RevenuesResidential
            
            $
            296,121
            
            
            $
            265,418
            
            
            $
            222,099
            
            
            $
            216,890
            
            
            $
            206,950Commercial
            
            
            326,303
            
            
            
            294,656
            
            
            
            257,661
            
            
            
            254,480
            
            
            
            251,092Industrial
            
            
            100,665
            
            
            
            99,970
            
            
            
            62,515
            
            
            
            61,146
            
            
            
            61,905Transmission
            
            
            26,029
            
            
            
            26,015
            
            
            
            20,093
            
            
            
            21,509
            
            
            
            18,327Wholesale
      long-term contracts
            
            
            166,465
            
            
            
            148,375
            
            
            
            149,707
            
            
            
            148,375
            
            
            
            158,085Wholesale
      short-term sales
            
            
            300,573
            
            
            
            279,854
            
            
            
            373,608
            
            
            
            442,406
            
            
            
            396,548Other
            
            
            26,786
            
            
            
            22,686
            
            
            
            29,781
            
            
            
            19,951
            
            
            
            20,138Total PNM Electric Revenues
            
            $
            1,242,942
            
            
            $
            1,136,974
            
            
            $
            1,115,464
            
            
            $
            1,164,757
            
            
            $
            1,113,045TNMP
      Electric RevenuesResidential
            
            $
            71,673
            
            
            $
            69,488
            
            
            $
            89,378
            
            
            $
            57,145
            
            
            $
            -Commercial
            
            
            72,786
            
            
            
            70,146
            
            
            
            88,767
            
            
            
            51,670
            
            
            
            -Industrial
            
            
            13,849
            
            
            
            7,876
            
            
            
            40,501
            
            
            
            25,189
            
            
            
            -Other
            
            
            31,974
            
            
            
            32,911
            
            
            
            38,344
            
            
            
            20,346
            
            
            
            -Total TNMP Revenues
            
            $
            190,282
            
            
            $
            180,421
            
            
            $
            256,990
            
            
            $
            154,350
            
            
            $
            -PNM
      Gas RevenuesResidential
            
            $
            342,509
            
            
            $
            338,548
            
            
            $
            328,690
            
            
            $
            311,043
            
            
            $
            292,163Commercial
            
            
            103,926
            
            
            
            102,252
            
            
            
            102,877
            
            
            
            98,929
            
            
            
            92,128Industrial
            
            
            3,851
            
            
            
            2,674
            
            
            
            4,749
            
            
            
            3,375
            
            
            
            2,889Transportation
            
            
            16,203
            
            
            
            15,124
            
            
            
            14,420
            
            
            
            13,813
            
            
            
            15,274Other
            
            
            40,464
            
            
            
            49,948
            
            
            
            58,093
            
            
            
            84,282
            
            
            
            88,467Total PNM Gas Revenues
            
            $
            506,953
            
            
            $
            508,546
            
            
            $
            508,829
            
            
            $
            511,442
            
            
            $
            490,921Altura
      Wholesale RevenuesLong-term
    contracts
            
            $
            -
            
            
            $
            65,395
            
            
            $
            125,131
            
            
            $
            -
            
            
            $
            -First
      Choice RevenuesResidential
            
            $
            407,350
            
            
            $
            390,329
            
            
            $
            345,961
            
            
            $
            198,218
            
            
            $
            -Mass-market
            
            
            52,700
            
            
            
            60,955
            
            
            
            81,917
            
            
            
            53,111
            
            
            
            -Mid-market
            
            
            149,315
            
            
            
            141,587
            
            
            
            129,171
            
            
            
            46,584
            
            
            
            -Trading
      gains (losses)
            
            
            (49,931
            )
            
            
            (3,553
            )
            
            
            9,322
            
            
            
            5,970
            
            
            
            -Other
            
            
            22,790
            
            
            
            11,377
            
            
            
            18,528
            
            
            
            12,447
            
            
            
            -Total First Choice Revenues
            
            $
            582,224
            
            
            $
            600,695
            
            
            $
            584,899
            
            
            $
            316,330
            
            
            $
            -





Notes:


TNMP
      and First Choice are reported from the date of acquisition, June 6,
      2005.


Altura
      Wholesale includes Twin Oaks from the date of acquisition, April 18, 2006
      through May 31, 2007 when Altura was contributed to Optim
      Energy.


Effective
      January 1, 2007, TNMP’s New Mexico operations were transferred to PNM
      Electric.








A-28


PNM
      RESOURCES, INC. AND SUBSIDIARIESCOMPARATIVE
      OPERATING STATISTICS2008
            
            
            2007
            
            
            2006
            
            
            2005
            
            
            2004PNM
      Electric MWh SalesResidential
            
            
            3,221,894
            
            
            
            3,208,593
            
            
            
            2,764,299
            
            
            
            2,652,475
            
            
            
            2,509,449Commercial
            
            
            4,028,696
            
            
            
            4,005,208
            
            
            
            3,635,423
            
            
            
            3,526,133
            
            
            
            3,450,503Industrial
            
            
            1,657,580
            
            
            
            1,920,086
            
            
            
            1,327,287
            
            
            
            1,277,156
            
            
            
            1,283,769Wholesale
      long-term contracts
            
            
            2,721,018
            
            
            
            2,697,249
            
            
            
            2,647,667
            
            
            
            2,516,907
            
            
            
            2,943,372Wholesale
      short-term sales
            
            
            3,497,705
            
            
            
            5,321,753
            
            
            
            6,517,641
            
            
            
            7,540,950
            
            
            
            8,424,712Other
            
            
            281,093
            
            
            
            265,989
            
            
            
            258,293
            
            
            
            256,201
            
            
            
            253,393Total PNM Electric MWh Sales
            
            
            15,407,986
            
            
            
            17,418,878
            
            
            
            17,150,610
            
            
            
            17,769,822
            
            
            
            18,865,198TNMP
      Electric MWh SalesResidential
            
            
            2,533,025
            
            
            
            2,520,605
            
            
            
            2,734,385
            
            
            
            1,839,741
            
            
            
            -Commercial
            
            
            2,206,155
            
            
            
            2,195,962
            
            
            
            2,579,854
            
            
            
            1,399,864
            
            
            
            -Industrial
            
            
            2,094,789
            
            
            
            1,927,934
            
            
            
            2,157,507
            
            
            
            1,263,452
            
            
            
            -Other
            
            
            107,524
            
            
            
            100,581
            
            
            
            121,227
            
            
            
            72,262
            
            
            
            -Total TNMP MWh Sales
            
            
            6,941,493
            
            
            
            6,745,082
            
            
            
            7,592,973
            
            
            
            4,575,319
            
            
            
            -PNM
      Gas Throughput - Decatherms(In
      thousands):Residential
            
            
            31,981
            
            
            
            29,468
            
            
            
            27,556
            
            
            
            28,119
            
            
            
            30,618Commercial
            
            
            11,302
            
            
            
            10,656
            
            
            
            10,409
            
            
            
            10,554
            
            
            
            11,639Industrial
            
            
            417
            
            
            
            313
            
            
            
            581
            
            
            
            369
            
            
            
            413Transportation
            
            
            37,073
            
            
            
            40,299
            
            
            
            39,202
            
            
            
            37,013
            
            
            
            43,208Other
            
            
            3,108
            
            
            
            5,357
            
            
            
            6,450
            
            
            
            9,780
            
            
            
            13,871Total PNM Gas Throughput
            
            
            83,881
            
            
            
            86,093
            
            
            
            84,198
            
            
            
            85,835
            
            
            
            99,749Altura
      Wholesale MWh SalesLong-term
      contracts
            
            
            -
            
            
            
            915,883
            
            
            
            1,683,707
            
            
            
            -
            
            
            
            -First
      Choice MWh SalesResidential
            
            
            2,547,490
            
            
            
            2,796,864
            
            
            
            2,481,557
            
            
            
            1,591,006
            
            
            
            -Mass-market
            
            
            278,304
            
            
            
            371,825
            
            
            
            549,143
            
            
            
            400,840
            
            
            
            -Mid-market
            
            
            1,176,840
            
            
            
            1,197,329
            
            
            
            1,159,160
            
            
            
            478,531
            
            
            
            -Other
            
            
            16,256
            
            
            
            21,075
            
            
            
            20,921
            
            
            
            29,780
            
            
            
            -Total First Choice MWh Sales
            
            
            4,018,890
            
            
            
            4,387,093
            
            
            
            4,210,781
            
            
            
            2,500,157
            
            
            
            -





Notes:


TNMP
      and First Choice are reported from the date of acquisition, June 6,
      2005.


Altura
      Wholesale includes Twin Oaks from the date of acquisition, April 18, 2006
      through May 31, 2007 when Altura was contributed to Optim
      Energy.


Effective
      January 1, 2007, TNMP’s New Mexico operations were transferred to PNM
      Electric.


Under
      TECA, customers of TNMP Electric in Texas can choose First Choice or any
      other REP to provide energy.  However, TNMP Electric delivers
      energy to customers within its service area regardless of the REP
      chosen.  Therefore, TNMP Electric earns revenue for energy
      delivery and First Choice earns revenue on the usage of that energy by its
      customers.  The MWh reported above for TNMP Electric and First
      Choice include 1,563,260, 2,018,110, and 2,332,098 MWh used by customers
      of TNMP Electric in 2008, 2007, and 2006, who have chosen First Choice as
      their REP.








A-29


PNM
      RESOURCES, INC. AND SUBSIDIARIESCOMPARATIVE
      OPERATING STATISTICS2008
            
            
            2007
            
            
            2006
            
            
            2005
            
            
            2004PNM
      Electric CustomersResidential
            
            
            442,647
            
            
            
            438,990
            
            
            
            388,775
            
            
            
            378,116
            
            
            
            367,491Commercial
            
            
            53,059
            
            
            
            52,780
            
            
            
            45,678
            
            
            
            44,721
            
            
            
            43,425Industrial
            
            
            284
            
            
            
            276
            
            
            
            279
            
            
            
            281
            
            
            
            290Wholesale
      long-term and short-term
            
            
            55
            
            
            
            54
            
            
            
            75
            
            
            
            76
            
            
            
            68Other
            
            
            991
            
            
            
            1,023
            
            
            
            829
            
            
            
            838
            
            
            
            818Total PNM Electric Customers
            
            
            497,036
            
            
            
            493,123
            
            
            
            435,636
            
            
            
            424,032
            
            
            
            412,092TNMP
      Electric CustomersResidential
            
            
            189,961
            
            
            
            184,304
            
            
            
            224,424
            
            
            
            222,819
            
            
            
            -Commercial
            
            
            38,733
            
            
            
            39,979
            
            
            
            47,566
            
            
            
            44,119
            
            
            
            -Industrial
            
            
            74
            
            
            
            76
            
            
            
            78
            
            
            
            125
            
            
            
            -Other
            
            
            2,122
            
            
            
            2,104
            
            
            
            2,224
            
            
            
            2,244
            
            
            
            -Total TNMP Customers
            
            
            230,890
            
            
            
            226,463
            
            
            
            274,292
            
            
            
            269,307
            
            
            
            -PNM
      Gas CustomersResidential
            
            
            461,285
            
            
            
            457,964
            
            
            
            451,518
            
            
            
            440,624
            
            
            
            430,578Commercial
            
            
            35,556
            
            
            
            35,805
            
            
            
            36,045
            
            
            
            35,136
            
            
            
            34,993Industrial
            
            
            43
            
            
            
            45
            
            
            
            45
            
            
            
            42
            
            
            
            47Transportation
            
            
            -
            
            
            
            -
            
            
            
            26
            
            
            
            26
            
            
            
            23Other
            
            
            2,218
            
            
            
            2,483
            
            
            
            1,995
            
            
            
            2,654
            
            
            
            2,931Total PNM Gas Customers
            
            
            499,102
            
            
            
            496,297
            
            
            
            489,629
            
            
            
            478,482
            
            
            
            468,572Altura
      Wholesale CustomersLong-term
            
            
            -
            
            
            
            1
            
            
            
            1
            
            
            
            -
            
            
            
            -First
      Choice CustomersResidential
            
            
            195,949
            
            
            
            213,630
            
            
            
            206,393
            
            
            
            178,150
            
            
            
            -Mass-market
            
            
            11,524
            
            
            
            17,536
            
            
            
            21,858
            
            
            
            24,364
            
            
            
            -Mid-market
            
            
            19,827
            
            
            
            15,386
            
            
            
            16,051
            
            
            
            6,475
            
            
            
            -Other
            
            
            10,131
            
            
            
            11,817
            
            
            
            9,427
            
            
            
            10,539
            
            
            
            -Total First Choice Customers
            
            
            237,431
            
            
            
            258,369
            
            
            
            253,729
            
            
            
            219,528
            
            
            
            -PNMR
      Generation StatisticsReliable
      Net Capability - MW
            
            
            2,713
            
            
            
            2,206
            
            
            
            1,934
            
            
            
            1,744
            
            
            
            1,729Coincidental
      Peak Demand - MW
            
            
            1,901
            
            
            
            1,933
            
            
            
            1,855
            
            
            
            1,779
            
            
            
            1,655Average
      Fuel Cost per Million BTU
            
            $
            2.404
            
            
            $
            1.7539
            
            
            $
            1.7143
            
            
            $
            1.4711
            
            
            $
            1.3751BTU
      per KWh of Net Generation
            
            
            10,269
            
            
            
            10,850
            
            
            
            10,641
            
            
            
            10,706
            
            
            
            10,442





Notes:


TNMP
      and First Choice are reported from the date of acquisition, June 6,
      2005.


Altura
      Wholesale includes Twin Oaks from the date of acquisition, April 18, 2006
      through May 31, 2007 when Altura was contributed to Optim
      Energy.


Effective
January 1, 2007, TNMP’s New Mexico operations were transferred to PNM
Electric.


The
      customers reported above for TNMP Electric and First Choice include
      92,792, 127,328, and 147,094 customers of TNMP Electric at December 31,
      2008, 2007, and 2006, who have chosen First Choice as their
      REP.  These TNMP Electric customers are also included in the
      First Choice customers.





A-30


ITEM
      7.
            MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATION





The
following Management’s Discussion and Analysis of Financial Condition and
Results of Operations for PNMR is presented on a combined basis, including
certain information applicable to PNM and TNMP.  The MD&A for PNM
and TNMP only includes a narrative analysis of results of operations as
permitted by Form 10-K General Instruction I (2).  Certain of the
tables below may not appear visually accurate due to rounding.





MD&A
FOR PNMR





BUSINESS
AND STRATEGY





Overview





The
overall strategy of PNMR is to “Build America’s Best Merchant Utility” through
concentrated effort on its core regulated and unregulated electric
businesses.  PNM sold its gas operations on January 30, 2009 and is
now positioned to focus on its regulated electric business.  The
growth of the unregulated electric business is expected from the further
development of Optim Energy and from First Choice.





The focus
on the electric businesses also includes environmental sustainability
efforts.  These efforts are comprised of various components including
environmental upgrades, energy efficiency leadership, solar generating site and
technology feasibility, expansion of the renewable energy portfolio of
generation resources, and climate change leadership.





Another initiative of PNMR is the
separation of its merchant operations from PNM Electric, which is being
accomplished in several steps.  In June 2008, PNMR completed the sale
of certain wholesale power, natural gas and transmission contracts as an initial
step in separating its merchant plant activities from PNM.  In
addition, Luna and Lordsburg are required to be separated by January 1, 2010
under an existing NMPRC regulatory order.  PNM is proposing to the
NMPRC that these units be included in retail rates beginning with PNM’s 2008
Electric Rate Case.  See Note 17.  PVNGS Unit 3, which is
not subject to the separation order, may remain in PNM.  In April
2008, PNM entered into three separate contracts for the sale of capacity and
energy related to its entire ownership interest in PVNGS Unit 3, which is 135
MW.  Under two of the contracts, PNM sells 90 MW of firm capacity and
energy.  Under the remaining contract, PNM sells 45 MW of unit contingent
capacity and energy.  The term of the contracts is May 1, 2008 through
December 31, 2010.  Under the two firm contracts, the two buyers made
prepayments of $40.6 million and $30.0 million.  The prepayments have been
recorded as deferred revenue and are being amortized over the life of the
contracts.





Critical
to PNMR’s success for the foreseeable future is the financial health of PNM,
PNMR’s largest subsidiary.  As discussed in Note 17, on April 24,
2008, the NMPRC issued a final order in PNM’s 2007 Electric Rate Case resulting
in a revenue increase of $34.4 million and new rates reflecting the increase
were effective for bills rendered on and after May 1, 2008.  In its
final order, the NMPRC disallowed recovery of costs associated with PNM’s RECs
that were being deferred as regulatory assets and to cap the recovery of coal
mine decommissioning costs at $100 million. PNM recorded pre-tax write-offs in
the first quarter of 2008 of $19.6 million related to the coal mine
decommissioning and $10.6 million for REC costs deferred through March 31,
2008.  PNM has appealed the NMPRC treatment of coal mine
decommissioning and the RECs to the New Mexico Supreme Court.  The
Company is unable to predict the outcome of this matter.  As a result
of PNM’s filing of the Emergency FPPAC described below, the NMPRC did not
address the merits of the FPPAC proposed in PNM’s 2007 Electric Rate
Case.





On March
20, 2008, PNM, together with the IBEW, filed a joint motion to implement an
Emergency FPPAC. The motion requested immediate authority to implement an
Emergency FPPAC for a period of 24 months or until the effective date of new
rates in PNM’s next rate case, whichever is earlier.  On May 22, 2008,
the NMPRC issued a final order that approved the Emergency FPPAC with certain
modifications relating to power plant performance and the treatment of revenue
from SO2
allowances.  The Emergency FPPAC permits PNM to recover its actual
fuel and purchased power costs up to $0.024972 per KWh, which is an increase of
$0.008979 per KWh above the fuel costs included in base rates. PNM is unable to
predict if actual fuel and purchased power costs, which have
averaged  $0.023710 since the Emergency FPPAC was implemented through
December 31, 2008, will exceed the cap during


A-31


the
period the Emergency FPPAC is in effect.  PNM implemented the
Emergency FPPAC, as modified, on June 2, 2008.  The Albuquerque
Bernalillo County Water Utility Authority and the New Mexico Industrial Energy
Consumers Inc. filed notices of appeal to the New Mexico Supreme Court, which
seek to have vacated the NMPRC order approving the Emergency FPPAC. The appeals
have been consolidated and PNM has been granted party status.  PNM is
unable to predict the final outcome of these appeals.





On
September 22, 2008, PNM filed its 2008 Electric Rate Case requesting the
NMPRC to approve an increase in electric service rates to all PNM retail
customers except those formerly served by TNMP. The proposed rates are designed
to increase annual operating revenue by $123.3 million, based on a March 31,
2008 ending test period and calculating base fuel costs using a projection of
costs for the 12 months ending March 31, 2009. PNM has also proposed a FPPAC
adjustment clause in the general form authorized by the NMPRC, but with PNM
retaining 25% of off-system sales revenue and crediting 75% against fuel and
purchased power costs.  As discussed in Note 17, the rate case
requests that rates allow PNM to recover costs related to the Valencia PPA and
its ownership in Luna and Lordsburg.  In addition, PNM requests
approval for the acquisition and recovery of cost for a portion of PVNGS Unit 2
that is currently leased from another subsidiary of PNMR.  The NMPRC
ordered that PNM‘s proposed rates be suspended for a period of nine months from
October 22, 2008. Hearings on the rate request are scheduled to begin on March
30, 2009.  PNM is unable to predict the final outcome of this
matter.





On August
29, 2008, TNMP filed with the PUCT for an $8.7 million increase in
revenues.  In its request, TNMP also asked for permission to implement
a catastrophe reserve fund similar to those approved for other transmission and
distribution companies in Texas. Catastrophe funds help pay for a utility
system’s recovery from natural disasters and acts of terrorism.  Once
the rate case is finalized by the PUCT, TNMP may update its transmission rates
annually to reflect changes in its invested capital.  On October 10,
2008, the PUCT issued a preliminary order permitting TNMP to file supplemental
testimony on costs caused by Hurricane Ike. These costs may be included in rates
or captured as a regulatory asset for review and approval in a subsequent
proceeding.  TNMP’s rate case is currently being held in abatement,
pending the final determination of the costs related to Hurricane Ike and
anticipated debt financing costs to be included in rates charged to
customers.  TNMP is unable to predict the outcome of this
matter.





As a REP,
First Choice operates in the highly competitive Texas retail
market.  During 2008, the Texas market experienced extreme price
volatility and transmission congestion.  This caused First Choice to
incur losses in its speculative trading portfolio and led to termination of
speculative activities.  These anomalies also negatively impacted the
margins realized from end use customers.  These conditions were
exacerbated by the impacts of Hurricane Ike and depressed economic conditions
resulting in very high levels of customer turnover and levels of uncollectible
accounts significantly higher than historical experience.  These
factors also contributed to impairments of the goodwill and other intangible
assets of First Choice.





Hurricane
Ike, which struck the Texas Gulf Coast on September 13, 2008, caused extensive
damage to the City of Galveston and the surrounding
communities.  Storm-related outages lowered TNMP sales volumes,
decreasing revenues, margins, and earnings. In addition, TNMP estimates power
restoration costs to be in the range of $18 million to $19 million. As a
provider of regulated transmission and distribution services under the
provisions of TECA, TNMP expects to recover prudently incurred storm-related
restoration costs in accordance with applicable regulatory and legal principles.
First Choice was negatively impacted due to reduced sales volumes and the sale
of excess power at prices that were lower than purchased prices. The storm only
caused minor damage to Optim Energy’s facilities, but Optim Energy was impacted
because of lost power sales opportunities and depressed market
prices.





The
recent and unprecedented disruption in the credit markets has had a significant
adverse impact on numerous financial institutions. As discussed in Note 6,
several of the financial institutions that the Company deals with have been
impacted. However, at this point in time, the Company’s existing liquidity
instruments have not been materially impacted by the credit environment and
management does not expect that it will be materially impacted in the near
future. We will continue to closely monitor our liquidity and the credit
markets.  In addition, there has been a significant decline in the
level of prices of marketable equity securities, including those held in trusts
maintained for future payments of benefits under pension and retiree medical
plans.  The stock market decline will likely result in increased
levels of funding and expense applicable to these trusts.


A-32


In the
last half of 2008 and early 2009, global economic conditions deteriorated
dramatically, encompassing the U.S. residential housing market, and global and
domestic equity and credit markets.  The tightening of the credit
markets coupled with extreme volatility in commodity markets has had a direct,
negative impact on several of First Choice’s competitors in the ERCOT retail
market.





Optim
Energy





PNMR’s
strategy for unregulated operations is focused on one of the nation’s growing
power markets.  PNMR intends to capitalize on the growth opportunities
through its participation and ownership in Optim Energy.  Optim
Energy’s anticipated business lines will consist of:





·
            Development,
      operation and ownership of diverse generation
  assets


·
            Wholesale
      marketing and trading to optimize its
assets





Business
Improvement Plan




In 2007,
the Company began a business improvement process that included a comprehensive
cost structure analysis of its operations and a benchmarking analysis to
similar-sized utilities.  During 2007 and 2008, the Company
implemented a series of initiatives designed to manage future operational costs,
maintain financial strength and strengthen its regulated
utilities.   The multi-phase process includes a business
improvement plan to streamline internal processes and reduce operating
costs.  The utility-related process enhancements are designed to
improve business functions.  For the years ended December 31, 2008 and
2007, the Company recorded pre-tax expense of $10.9 million and $12.6 million
for costs of the business improvement plan, primarily severance-related and
consulting costs.  As additional phases of the business improvement
plan are developed, the associated costs will be analyzed and recorded as
specified by GAAP.





RESULTS
OF OPERATIONS – PNMR





Executive
Summary





A summary
of PNMR’s net earnings is as follows:





Year
      Ended December 31,
            
            
            Change2008
            
            
            2007
            
            
            2006
            
            
            
            2008/2007
            
            
            
            2007/2006(In
      millions, except per share amounts)Earnings
      (loss) from continuing operations
            
            $
            (305.3
            )
            
            $
            59.4
            
            
            $
            108.0
            
            
            $
            (364.6
            )
            
            $
            (48.6
            )Earnings
      from discontinued operations,
              net
      of income taxes
            
            
            34.6
            
            
            
            15.5
            
            
            
            12.9
            
            
            
            19.1
            
            
            
            2.7Net
      earnings (loss)
            
            $
            (270.6
            )
            
            $
            74.9
            
            
            $
            120.8
            
            
            $
            (345.5
            )
            
            $
            (45.9
            )Average
      common and common equivalent shares
            
            
            83.5
            
            
            
            77.9
            
            
            
            70.6
            
            
            
            5.6
            
            
            
            7.3Earnings
      (loss) from continuing operations per diluted share
            
            $
            (3.66
            )
            
            $
            0.76
            
            
            $
            1.53
            
            
            $
            (4.42
            )
            
            $
            (0.77
            )Net
      earnings (loss) per diluted share
            
            $
            (3.24
            )
            
            $
            0.96
            
            
            $
            1.71
            
            
            $
            (4.20
            )
            
            $
            (0.75
            )





A-33


The components of the changes in
earnings (loss) from continuing operations by segment are:





Change2008/2007
            
            
            
            2007/2006(In
      millions)PNM
      Electric
            
            $
            (89.9
            )
            
            $
            (34.7
            )TNMP
      Electric
            
            
            (27.2
            )
            
            
            2.7Altura
            
            
            (5.2
            )
            
            
            (18.7
            )First
      Choice
            
            
            (204.8
            )
            
            
            (12.8
            )Corporate
      and Other
            
            
            (15.1
            )
            
            
            10.3Optim
      Energy
            
            
            (22.5
            )
            
            
            4.6Net
      change
            
            $
            (364.6
            )
            
            $
            (48.6
            )





Results
of operations were negatively impacted by several major factors during
2008.  Impairments of goodwill and other intangible assets were
recorded at PNM, TNMP, and First Choice, as well as at Optim
Energy.  After-tax impairment losses reduced net earnings by $212.1
million.  PNM Electric recorded regulatory disallowances of $18.3
million after-tax resulting from its 2007 Electric Rate Case.  General
declines in the stock market negatively impacted the values of investments in
the NDT resulting in an after-tax decrease in earnings of $16.2 million in 2008
compared to 2007.  As a result of anomalies in the Texas energy
market, First Choice experienced after-tax losses in its speculative trading
operations, which were terminated in 2008, that were $29.8 million greater in
2008 than 2007.  In addition, economic conditions resulted in high
default rates and uncollectible accounts at First Choice resulting in First
Choice bad debt expense being $23.6 million greater after-tax in 2008 than in
2007.  Optim Energy wrote-off its inventory of emissions allowances related
to CAIR as a result of that program being invalidated.  PNMR's share of the
after-tax loss was $9.6 million.





Income
tax expense or benefit for 2008 was significantly impacted by the impairments of
goodwill since the expense recorded for the impairments is not deductible for
income tax purposes.  The consolidated effective income tax rates for
2008 were 22.97% for PNMR, 13.11% for PNM, and 476.65% for
TNMP.  Excluding the losses due to goodwill impairment, the effective
income tax rates would have been 41.05% for PNMR, 39.55% for PNM, and 30.25% for
TNMP.





The
increase in the number of common and common equivalent shares is primarily due
to new issuances of PNMR common stock in 2006 and in connection with securities
issued in connection with the equity-linked units in 2008. See Note
6.





Segment
Information





The
following discussion is based on the segment methodology that PNMR’s management
uses for making operating decisions and assessing performance of its various
business activities.  Effective as of December 31, 2007, management
changed the methodology it uses to operate and assess the business activities of
the Company, resulting in changes to the Company’s segment
presentation.  See Note 3 for more information on PNMR’s operating
segments.  References to 2006 amounts in the following discussion have
not been adjusted to reflect the transfer of TNMP’s New Mexico operations that
are discussed above.





The
following discussion and analysis should be read in conjunction with the
Consolidated Financial Statements and Notes thereto.  Trends and
contingencies of a material nature are discussed to the extent
known.  Refer also to Disclosure Regarding Forward Looking Statements
in Item 1 and to Part II, Item 7A. Risk Factors.





A-34


PNM
Electric





The table
below summarizes operating results for PNM Electric:





Year
      Ended December 31,
            
            
            Change2008
            
            
            2007
            
            
            2006
            
            
            
            2008/2007
            
            
            
            2007/2006(In
      millions)Total
      revenues
            
            $
            1,242.9
            
            
            $
            1,137.0
            
            
            $
            1,115.5
            
            
            $
            106.0
            
            
            $
            21.5Cost
      of energy
            
            
            698.1
            
            
            
            638.7
            
            
            
            607.0
            
            
            
            59.4
            
            
            
            31.7Gross
      margin
            
            
            544.9
            
            
            
            498.3
            
            
            
            508.4
            
            
            
            46.6
            
            
            
            (10.1
            )Operating
      expenses
            
            
            465.7
            
            
            
            381.1
            
            
            
            331.1
            
            
            
            84.6
            
            
            
            50.0Depreciation
      and amortization
            
            
            85.7
            
            
            
            83.2
            
            
            
            78.0
            
            
            
            2.5
            
            
            
            5.2Operating
      income (loss)
            
            
            (6.5
            )
            
            
            34.0
            
            
            
            99.3
            
            
            
            (40.5
            )
            
            
            (65.3
            )Other
      income (deductions)
            
            
            (0.1
            )
            
            
            53.3
            
            
            
            37.4
            
            
            
            (53.4
            )
            
            
            15.9Net
      interest charges
            
            
            (69.9
            )
            
            
            (52.7
            )
            
            
            (47.1
            )
            
            
            (17.2
            )
            
            
            (5.6
            )Earnings
      (loss) before income taxes
            
            
            (76.5
            )
            
            
            34.6
            
            
            
            89.7
            
            
            
            (111.1
            )
            
            
            (55.1
            )Income
      taxes (benefit)
            
            
            (10.0
            )
            
            
            11.2
            
            
            
            31.6
            
            
            
            (21.2
            )
            
            
            (20.4
            )Preferred
      stock dividend requirements
            
            
            0.5
            
            
            
            0.5
            
            
            
            0.5
            
            
            
            -
            
            
            
            -Segment
      earnings (loss)
            
            $
            (67.0
            )
            
            $
            22.9
            
            
            $
            57.6
            
            
            $
            (89.9
            )
            
            $
            (34.7
            )





The table
below summarizes the significant changes to total revenues, cost of energy, and
gross margin:





2008/2007
      Change
            2007/2006
      ChangeTotal
            
            
            Cost
      of
            
            
            Gross
            
            
            Total
            
            
            Cost
      of
            
            
            GrossRevenues
            
            
            Energy
            
            
            Margin
            
            
            Revenues
            
            
            Energy
            
            
            Margin(In
      millions)Regulated
      fuel costs and rate recovery
            
            $
            102.9
            
            
            $
            65.6
            
            
            $
            37.3
            
            
            $
            5.2
            
            
            $
            9.4
            
            
            $
            (4.2
            )Sales
      of SO2
      credits
            
            
            (17.2
            )
            
            
            -
            
            
            
            (17.2
            )
            
            
            5.2
            
            
            
            -
            
            
            
            5.2Unregulated
      margins
            
            
            (81.1
            )
            
            
            (89.2
            )
            
            
            8.1
            
            
            
            9.2
            
            
            
            33.5
            
            
            
            (24.3
            )Gain
      on sale of merchant portfolio
            
            
            5.1
            
            
            
            -
            
            
            
            5.1
            
            
            
            -
            
            
            
            -
            
            
            
            -Net
      unrealized economic hedges
            
            
            96.2
            
            
            
            93.4
            
            
            
            2.8
            
            
            
            (46.6
            )
            
            
            (37.8
            )
            
            
            (8.8
            )Consolidation
      of Valencia PPA
            
            
            -
            
            
            
            (10.4
            )
            
            
            10.4
            
            
            
            -
            
            
            
            -
            
            
            
            -Transfer
      of assets from TNMP
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            48.5
            
            
            
            26.5
            
            
            
            22.0Other
            
            
            0.1
            
            
            
            -
            
            
            
            0.1
            
            
            
            -
            
            
            
            0.1
            
            
            
            -Total
      increase (decrease)
            
            $
            106.0
            
            
            $
            59.4
            
            
            $
            46.6
            
            
            $
            21.5
            
            
            $
            31.7
            
            
            $
            (10.1
            )





The
following table shows PNM Electric operating revenues by customer class,
including intersegment revenues and average number of customers:





Year
      Ended December 31,
            
            
            Change2008
            
            
            2007(1)
            
            
            2006(1)
            
            
            
            2008/2007
            
            
            
            2007/2006(In
      millions, except customers)Residential
            
            $
            296.1
            
            
            $
            265.4
            
            
            $
            222.1
            
            
            $
            30.7
            
            
            $
            43.3Commercial
            
            
            326.3
            
            
            
            294.7
            
            
            
            257.7
            
            
            
            31.6
            
            
            
            37.0Industrial
            
            
            100.7
            
            
            
            100.0
            
            
            
            62.5
            
            
            
            0.7
            
            
            
            37.5Transmission
            
            
            26.0
            
            
            
            26.0
            
            
            
            20.1
            
            
            
            -
            
            
            
            5.9Other
      retail
            
            
            26.8
            
            
            
            22.7
            
            
            
            29.8
            
            
            
            4.1
            
            
            
            (7.1
            )Wholesale
      long-term sales
            
            
            166.5
            
            
            
            148.4
            
            
            
            149.7
            
            
            
            18.1
            
            
            
            (1.3
            )Wholesale
      short-term sales
            
            
            300.5
            
            
            
            279.8
            
            
            
            373.6
            
            
            
            20.8
            
            
            
            (93.8
            )$
            1,242.9
            
            
            $
            1,137.0
            
            
            $
            1,115.5
            
            
            $
            106.0
            
            
            $
            21.5Average
      retail customers (thousands)
            
            
            495.3
            
            
            
            489.4
            
            
            
            430.2
            
            
            
            5.9
            
            
            
            59.2





(1)
            The
      customer class revenues have been reclassified to be consistent with the
      current year presentation.


A-35


The
following table shows PNM Electric GWh sales by customer class:





Year
      Ended December 31,
            
            
            Change2008
            
            
            2007
            
            
            2006
            
            
            
            2008/2007
            
            
            
            2007/2006(Gigawatt
      hours)Residential
            
            
            3,221.9
            
            
            
            3,208.6
            
            
            
            2,764.3
            
            
            
            13.3
            
            
            
            444.3Commercial
            
            
            4,028.7
            
            
            
            4,005.2
            
            
            
            3,635.4
            
            
            
            23.5
            
            
            
            369.8Industrial
            
            
            1,657.6
            
            
            
            1,920.1
            
            
            
            1,327.3
            
            
            
            (262.5
            )
            
            
            592.8Other
      retail
            
            
            281.1
            
            
            
            266.0
            
            
            
            258.3
            
            
            
            15.1
            
            
            
            7.7Wholesale
      long-term sales
            
            
            2,721.0
            
            
            
            2,697.2
            
            
            
            2,647.7
            
            
            
            23.8
            
            
            
            49.5Wholesale
      short-term sales
            
            
            3,497.7
            
            
            
            5,321.8
            
            
            
            6,517.6
            
            
            
            (1,824.1
            )
            
            
            (1,195.8
            )15,408.0
            
            
            
            17,418.9
            
            
            
            17,150.6
            
            
            
            (2,010.9
            )
            
            
            268.3





Effective
January 1, 2007, TNMP’s New Mexico operations were transferred to PNM, which
increased PNM Electric’s retail sales volumes, average retail customers and
retail operating revenues.  Prior to the transfer of operations in
2007, PNM supplied the power to serve TNMP’s New Mexico load through
intersegment long-term and short-term sales contracts that were eliminated in
the consolidated financial statements of PNMR after the acquisition of TNP on
June 6, 2005.   Information concerning the TNMP New Mexico
operations included in the TNMP Electric segment in 2006, the gross margin
associated with intersegment contract sales in 2006, and the net impact is as
follows:





TNMP
New Mexico’s Operations





Year
      Ended December 31, 2006TNMP
      New Mexico Operations
            
            
            PNM
      Contract
              Sales
            
            
            Net
      Impact(Dollars
      in millions)Total
      revenue
            
            $
            99.1
            
            
            $
            50.6
            
            
            $
            48.5Cost
      of energy
            
            
            75.4
            
            
            
            48.9
            
            
            
            26.5Gross margin
            
            
            23.7
            
            
            
            1.7
            
            
            
            22.0Operating
      expense
            
            
            12.8
            
            
            
            -
            
            
            
            12.8Depreciation
      and amortization
            
            
            6.0
            
            
            
            -
            
            
            
            6.0Operating income
            
            
            4.9
            
            
            
            1.7
            
            
            
            3.2Other
      income (deductions)
            
            
            0.2
            
            
            
            -
            
            
            
            0.2Earnings
      before income taxes
            
            
            5.1
            
            
            
            1.7
            
            
            
            3.4Income
      taxes
            
            
            1.5
            
            
            
            0.7
            
            
            
            0.8Earnings
            
            $
            3.6
            
            
            $
            1.0
            
            
            $
            2.6Sales
      volumes (GWhs)
            
            
            1,124.0
            
            
            
            627.6
            
            
            
            496.4Average
      customers (thousands)
            
            
            49.5
            
            
            
            n/a
            
            
            
            49.5





The
following discussion of results will exclude variances due to the transfer of
New Mexico operations from TNMP on January 1, 2007, that are shown
above.  See MD&A - PNM Gas for information on items included in
PNM Electric that historically were allocated to PNM Gas.





See Note
17 for a discussion of the 2007 Electric Rate Case and the Emergency
FPPAC.   The base rate increase combined with changes in customer
mix and usage resulted in a $30.8 million increase to revenues and gross margin
in 2008.  The Emergency FPPAC resulted in a $36.9 million increase to
revenues and gross margin in 2008, reflecting the net amount of fuel and
purchased power costs used to serve retail loads that were recovered in addition
to amount recovered through base rates.





During
2008, sales volumes to regulated customers decreased compared to 2007, as a
small increase in the average customer count was more than offset by lower
per-customer usage and the reduced operations of a major industrial
customer.  The costs to serve regulated customers increased largely
due to higher coal prices and higher replacement power prices for market
purchases required when resources were not sufficient to meet load requirements,
largely due to reduced availability at SJGS.  These costs were
partially offset by an increase in off-system sales revenues largely due to
increased availability at PVNGS, which allowed for market sales when




A-36


resources
were in excess of load requirements.  The weighted-average baseload
equivalent availability factor for 2008 was 78.7%, compared to 79.2% in
2007.





During
2007, an increase in the average customer count and increased per-customer usage
due to weather increased sales volumes to regulated customers and
revenues.  However, this increase in revenues was more than offset by
the increased costs to serve regulated load requirements, including higher coal
prices and a greater need for replacement power purchases at higher prices when
resources were not sufficient to meet load requirements, particularly during
times of baseload generation plant outages.  The weighted-average
baseload equivalent availability factor for 2007 was 79.2%, compared to 83.9% in
2006.





Sales of
SO2
allowances in 2008 decreased compared to 2007, while 2007 sales increased over
2006 levels, impacting revenues and gross margin.





Unregulated
revenues and cost of energy related to unregulated margins decreased due to the
sale of the merchant portfolio in June 2008.  These decreases were
partially offset by increased revenues and cost of energy, including demand
charges, from the dispatch of unregulated gas plants based on market
profitability.  Additionally, unregulated revenues increased due to
increased PVNGS availability and more favorable pricing terms under the forward
sales agreement at PVNGS, resulting in a net increase to margin.





A gain on
the sale of the merchant portfolio in June 2008 increased total revenues and
gross margin.  PNM’s merchant portfolio included certain wholesale
power, natural gas and transmission contracts that represent a significant
portion of the wholesale activity portfolio of PNM Electric and several
long-term sales and purchase power agreements.  See Note
8.





Changes
in net unrealized mark-to-market gains and losses on economic hedges were driven
by increased gas and electric price movements, primarily due to losses incurred
in 2007 on certain contracts that no longer qualified for the normal exception
as a result of the pending sale of the merchant portfolio.





In 2008,
cost of energy was reduced due to the Valencia PPA, which was consolidated under
FIN 46R.  See Note 9.  Consolidation results in amounts
being reflected as operating expenses and minority interest that otherwise would
have been included in cost of energy.





Operating
expenses increased in both 2008 and 2007.  In 2008, the increase in
operating expenses is due to a $51.1 million impairment of goodwill as a result
of the annual impairment assessment (See Note 25), $30.2 million of regulatory
disallowances resulting from the NMPRC’s rate order dated April 24, 2008,
including write-offs of $10.6 million for deferred costs of RECs and $19.6
million for coal mine decommissioning costs, and an increase in energy
production costs due primarily to increased plant outage costs at SJGS related
to environmental outages and a full year of Afton maintenance
costs.  These increases were partially offset by net reductions in
expenses due to the business improvement process, a decrease in taxes other than
income taxes resulting from technology tax credits, gains on the sale of a
turbine in 2007 and the impairment of Afton in 2007, as the cost of construction
exceeded the amount allowed by a NMPRC rate order.





In 2007,
in addition to the impairment of Afton and gains on the sale of a turbine,
energy production costs increased due to higher plant outage costs at SJGS, Four
Corners and PVNGS, including the extension of a planned outage at PVNGS Unit 3
and the cost of removal of the steam generators.  Energy production
costs also increased due to higher maintenance costs at SJGS and Afton, and a
full year of operations at Luna.  Increases to administrative and
general expenses, transmission and distribution costs and taxes other than
income were primarily due to the transfer of assets from TNMP and severance and
consulting costs associated with the business improvement plan to reduce costs
and improve processes in future years, partially offset by reductions in
incentive-based compensation expenses.





In 2008,
depreciation expense increased primarily due to the completion of Afton and the
consolidation of Valencia.  In 2007, depreciation expense increased
due to the transfer of assets from TNMP, partially offset by a $2.3 million
decrease in depreciation expense at Four Corners due to an increase in its
estimated useful life.





A-37


Other
income and deductions decreased in 2008 due to realized losses related to NDT
assets, along with other than temporarily impairment losses recognized in
accordance with SFAS 115.  These losses totaled $15.2 million in 2008,
compared to gains of $11.6 million in 2007.  Other income and
deductions was also impacted by FIN 48, which was implemented in 2007. In 2007,
$10.6 million of interest income related to unrecognized tax benefits was
recorded under FIN 48, whereas no such income was recorded in 2006.  A
reduction in interest income related to FIN 48 of $5.1 million was recorded in
2008.  In addition, a $2.5 million reduction in interest from PVNGS
lessor notes and a $7.2 million reduction due to consolidation of the minority
interest in Valencia impacted other income and deductions in 2008.  In
2007, other income and deductions also increased due to increased gains related
to NDT assets.





In 2008,
interest expenses increased due to higher borrowings at higher long-term
interest rates, along with transaction fees associated with the refinancing of
debt.  In 2007, interest expenses increased due to higher short-term
borrowings used to fund capital expenditures.





TNMP
Electric





The table
below summarizes the operating results for TNMP Electric:








Year
      Ended December 31,
            
            
            Change2008
            
            
            2007
            
            
            2006
            
            
            
            2008/2007
            
            
            
            2007/2006(In
      millions)Total
      revenues
            
            $
            190.3
            
            
            $
            180.4
            
            
            $
            257.0
            
            
            $
            9.9
            
            
            $
            (76.6
            )Cost
      of energy
            
            
            32.7
            
            
            
            29.5
            
            
            
            103.0
            
            
            
            3.2
            
            
            
            (73.5
            )Gross
      margin
            
            
            157.6
            
            
            
            150.9
            
            
            
            154.0
            
            
            
            6.7
            
            
            
            (3.1
            )Operating
      expenses
            
            
            101.5
            
            
            
            67.8
            
            
            
            79.3
            
            
            
            33.6
            
            
            
            (11.5
            )Depreciation
      and amortization
            
            
            38.7
            
            
            
            30.4
            
            
            
            31.6
            
            
            
            8.3
            
            
            
            (1.2
            )Operating
      income
            
            
            17.4
            
            
            
            52.7
            
            
            
            43.1
            
            
            
            (35.2
            )
            
            
            9.6Other
      income (deductions)
            
            
            3.2
            
            
            
            1.6
            
            
            
            8.8
            
            
            
            1.7
            
            
            
            (7.3
            )Net
      interest charges
            
            
            (18.3
            )
            
            
            (25.2
            )
            
            
            (28.9
            )
            
            
            6.8
            
            
            
            3.7Earnings
      before income taxes
            
            
            2.3
            
            
            
            29.1
            
            
            
            23.0
            
            
            
            (26.7
            )
            
            
            6.1Income
      taxes
            
            
            11.1
            
            
            
            10.6
            
            
            
            7.3
            
            
            
            0.5
            
            
            
            3.3Segment
      earnings (loss)
            
            $
            (8.8
            )
            
            $
            18.4
            
            
            $
            15.7
            
            
            $
            (27.2
            )
            
            $
            2.7





The table
below summarizes the significant changes to total revenues, cost of energy, and
gross margin:





2008/2007
      Change
            2007/2006
      ChangeTotal
            
            
            Cost
      of
            
            
            Gross
            
            
            Total
            
            
            Cost
      of
            
            
            GrossRevenues
            
            
            Energy
            
            
            Margin
            
            
            Revenues
            
            
            Energy
            
            
            Margin(In
      millions)Transfer
      of assets to PNM
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            (99.1
            )
            
            $
            (75.4
            )
            
            $
            (23.7
            )Customer
      growth/usage
            
            
            4.9
            
            
            
            -
            
            
            
            4.9
            
            
            
            4.1
            
            
            
            -
            
            
            
            4.1Hurricane
      Ike margin impact
            
            
            (1.6
            )
            
            
            -
            
            
            
            (1.6
            )
            
            
            -
            
            
            
            -
            
            
            
            -PUCT
      order
            
            
            4.2
            
            
            
            -
            
            
            
            4.2
            
            
            
            16.4
            
            
            
            -
            
            
            
            16.4Other
            
            
            2.4
            
            
            
            3.2
            
            
            
            (0.8
            )
            
            
            2.0
            
            
            
            1.9
            
            
            
            0.1Total
      increase (decrease)
            
            $
            9.9
            
            
            $
            3.2
            
            
            $
            6.7
            
            
            $
            (76.6
            )
            
            $
            (73.5
            )
            
            $
            (3.1
            )





A-38


The
following table shows TNMP Electric operating revenues by customer class,
including intersegment revenues, and average number of customers:





Year
      Ended December 31,
            
            
            Change2008
            
            
            2007
            
            
            2006
            
            
            
            2008/2007
            
            
            
            2007/2006(In
      millions, except customers)Residential
            
            $
            71.7
            
            
            $
            69.5
            
            
            $
            89.4
            
            
            $
            2.2
            
            
            $
            (20.0
            )Commercial
            
            
            72.8
            
            
            
            70.1
            
            
            
            88.8
            
            
            
            2.7
            
            
            
            (18.6
            )Industrial
            
            
            13.8
            
            
            
            7.9
            
            
            
            40.5
            
            
            
            5.9
            
            
            
            (32.6
            )Other
            
            
            32.0
            
            
            
            32.9
            
            
            
            38.3
            
            
            
            (0.9
            )
            
            
            (5.4
            )$
            190.3
            
            
            $
            180.4
            
            
            $
            257.0
            
            
            $
            9.9
            
            
            $
            (76.6
            )Average
      customers (thousands) (1)
            
            
            229.5
            
            
            
            226.2
            
            
            
            272.6
            
            
            
            3.3
            
            
            
            (46.4
            )





(1)
            Under
      TECA, customers of TNMP Electric in Texas have the ability to choose First
      Choice or any other REP to provide energy.  The average
      customers reported above include 112,638, 137,015, and 153,693 customers
      of TNMP Electric at December 31, 2008, 2007, and 2006 who have chosen
      First Choice as their REP.  These customers are also included in
      the First Choice segment.




The following table shows TNMP Electric GWh sales by customer
class:





Year
      Ended December 31,
            
            
            Change2008
            
            
            2007
            
            
            2006
            
            
            
            2008/2007
            
            
            
            2007/2006(Gigawatt
      hours)Residential
            
            
            2,533.0
            
            
            
            2,520.6
            
            
            
            2,734.4
            
            
            
            12.4
            
            
            
            (213.8
            )Commercial
            
            
            2,206.2
            
            
            
            2,196.0
            
            
            
            2,579.9
            
            
            
            10.2
            
            
            
            (383.9
            )Industrial
            
            
            2,094.8
            
            
            
            1,927.9
            
            
            
            2,157.5
            
            
            
            166.9
            
            
            
            (229.6
            )Other
            
            
            107.5
            
            
            
            100.6
            
            
            
            121.2
            
            
            
            6.9
            
            
            
            (20.6
            )6,941.5
            
            
            
            6,745.1
            
            
            
            7,593.0
            
            
            
            196.4
            
            
            
            (847.9
            )





(1)
            The
      GWh sales reported above include 1,563.3, 2,018.1, and 2,332.1 GWhs for
      December 31, 2008, 2007, and 2006 used by customers of TNMP Electric who
      have chosen First Choice as their REP.  These GWhs are also
      included below in the First Choice
segment.





Effective
January 1, 2007, TNMP’s New Mexico operations were transferred to PNM,
decreasing sales volumes, average customers, and income statement line items for
TNMP Electric as set forth in PNM Electric above.





In 2007
and 2008, increases in the average customer count and higher per-customer usage
increased sales volumes, revenues and gross margin.  In 2008, warmer
temperatures in June and July were partially offset by milder temperatures at
the beginning and ending of the year along with Hurricane Ike, which struck the
Gulf Coast in September 2008 and resulted in a decrease to customer
usage.





2007
revenues included a fuel credit to industrial customers, as ordered by the
PUCT.  The conclusion of this credit in December of 2007 resulted in
increased revenues and gross margin in 2008.  Additionally, the
collection of stranded costs incurred by TNMP as part of the deregulation of the
Texas energy market increased revenues slightly, as collections are based on
customer usage.  These increases are offset by increases in
depreciation and amortization related to the amortization of these regulatory
assets.





Other
changes to revenues, cost of energy and gross margin relate to transmission
prices charged to and from other transmission and distribution
providers.





Operating
expenses increased in 2008 due to an impairment of goodwill amounting to $34.5
million as a result of the annual impairment assessment. See Note
25.  In 2007, operating expenses decreased from 2006 primarily due to
the transfer of assets to PNM and by reductions in incentive-based compensation
expenses, partially




A-39


offset by
severance and consulting costs associated with the business improvement plan to
reduce costs and improve processes in future years.





Depreciation
and amortization expense increased in 2008 due to increased amortizations of
regulatory assets for stranded costs, depreciation on higher plant balances, and
the absence of amortizations of a regulatory liability in 2007 related to the
industrial fuel credit.  In 2007, the decrease in depreciation and
amortization relating to the amortization of the industrial fuel credit and the
transfer of assets to PNM was mostly offset by the increased amortization on
stranded costs and depreciation on higher plant balances.





In 2008,
other income and deductions increased due to gains on the sale of non-utility
property and higher contributions in aid of construction, partially offset by a
decrease in interest income related to FIN 48.  In 2007, other income
and deductions decreased primarily due to the absence of carrying charges on
stranded costs earned in 2006, prior to the collection of these costs, and lower
interest income due to reduced cash balances.  These decreases were
partially offset by higher collections of contributions in aid of
construction.





Interest
charges decreased in 2008 and 2007 due to a $100 million reduction of long-term
debt in the second quarter of 2007, along with the repayment of $148.9 million
of long-term debt in the second quarter of 2008 utilizing additional short-term
debt with a lower interest cost.





PNM
Gas





The table
below summarizes the operating results for PNM Gas, which is classified as
discontinued operations in the Consolidated Statements of Earnings:





Year
      Ended December 31,
            
            
            Change2008
            
            
            2007
            
            
            2006
            
            
            
            2008/2007
            
            
            
            2007/2006(In
      millions)Total
      revenues
            
            $
            507.0
            
            
            $
            508.5
            
            
            $
            508.8
            
            
            $
            (1.6
            )
            
            $
            (0.3
            )Cost
      of energy
            
            
            346.6
            
            
            
            352.8
            
            
            
            361.9
            
            
            
            (6.2
            )
            
            
            (9.1
            )Gross
      margin
            
            
            160.4
            
            
            
            155.7
            
            
            
            147.0
            
            
            
            4.6
            
            
            
            8.7Operating
      expenses
            
            
            92.2
            
            
            
            97.1
            
            
            
            96.8
            
            
            
            (4.9
            )
            
            
            0.3Depreciation
      and amortization
            
            
            -
            
            
            
            21.6
            
            
            
            21.6
            
            
            
            (21.6
            )
            
            
            -Operating
      income
            
            
            68.2
            
            
            
            37.0
            
            
            
            28.6
            
            
            
            31.2
            
            
            
            8.4Other
      income (deductions)
            
            
            2.6
            
            
            
            1.1
            
            
            
            4.1
            
            
            
            1.4
            
            
            
            (3.0
            )Net
      interest charges
            
            
            (13.2
            )
            
            
            (12.2
            )
            
            
            (11.4
            )
            
            
            (1.0
            )
            
            
            (0.8
            )Earnings
      before income taxes
            
            
            57.6
            
            
            
            25.9
            
            
            
            21.3
            
            
            
            31.7
            
            
            
            4.6Income
      taxes
            
            
            23.0
            
            
            
            10.4
            
            
            
            8.4
            
            
            
            12.6
            
            
            
            2.0Segment
      earnings
            
            $
            34.6
            
            
            $
            15.5
            
            
            $
            12.9
            
            
            $
            19.1
            
            
            $
            2.6





The table
below summarizes the significant changes to total revenues, cost of energy, and
gross margin:





2008/2007
      Change
            2007/2006
      ChangeTotal
            
            
            Cost
      of
            
            
            Gross
            
            
            Total
            
            
            Cost
      of
            
            
            GrossRevenues
            
            
            Energy
            
            
            Margin
            
            
            Revenues
            
            
            Energy
            
            
            Margin(In
      millions)Gas
      prices
            
            $
            (1.7
            )
            
            $
            (1.7
            )
            
            $
            -
            
            
            $
            (22.3
            )
            
            $
            (22.3
            )
            
            $
            -Rate
      increase
            
            
            5.1
            
            
            
            -
            
            
            
            5.1
            
            
            
            2.9
            
            
            
            -
            
            
            
            2.9Customer
      growth/usage
            
            
            4.6
            
            
            
            3.7
            
            
            
            0.9
            
            
            
            25.2
            
            
            
            18.9
            
            
            
            6.3Off-system
      activities
            
            
            (8.5
            )
            
            
            (8.2
            )
            
            
            (0.3
            )
            
            
            (5.1
            )
            
            
            (5.5
            )
            
            
            0.4Other
            
            
            (1.1
            )
            
            
            -
            
            
            
            (1.1
            )
            
            
            (1.0
            )
            
            
            (0.2
            )
            
            
            (0.9
            )Total
      increase (decrease)
            
            $
            (1.6
            )
            
            $
            (6.2
            )
            
            $
            4.6
            
            
            $
            (0.3
            )
            
            $
            (9.1
            )
            
            $
            8.7





A-40


The
following table shows PNM Gas operating revenues by customer class and average
number of customers:





Year
      Ended December 31,
            
            
            Change2008
            
            
            2007
            
            
            2006
            
            
            
            2008/2007
            
            
            
            2007/2006(In
      millions, except customers)Residential
            
            $
            342.5
            
            
            $
            338.5
            
            
            $
            328.7
            
            
            $
            4.0
            
            
            $
            9.8Commercial
            
            
            103.9
            
            
            
            102.3
            
            
            
            102.9
            
            
            
            1.6
            
            
            
            (0.6
            )Industrial
            
            
            3.9
            
            
            
            2.7
            
            
            
            4.7
            
            
            
            1.2
            
            
            
            (2.0
            )Transportation(1)
            
            
            16.2
            
            
            
            15.1
            
            
            
            14.4
            
            
            
            1.1
            
            
            
            0.7Other
            
            
            40.5
            
            
            
            49.9
            
            
            
            58.1
            
            
            
            (9.5
            )
            
            
            (8.2
            )$
            507.0
            
            
            $
            508.5
            
            
            $
            508.8
            
            
            $
            (1.6
            )
            
            $
            (0.3
            )Average
      customers (thousands)
            
            
            496.5
            
            
            
            491.6
            
            
            
            482.3
            
            
            
            4.9
            
            
            
            9.3





(1)
            Customer-owned
      gas.





The
following table shows PNM Gas throughput by customer class:





Year
      Ended December 31,
            
            
            Change2008
            
            
            2007
            
            
            2006
            
            
            
            2008/2007
            
            
            
            2007/2006(Thousands
      of decatherms)Residential
            
            
            31,981.0
            
            
            
            29,468.1
            
            
            
            27,556.1
            
            
            
            2,512.9
            
            
            
            1,912.0Commercial
            
            
            11,302.1
            
            
            
            10,655.6
            
            
            
            10,409.5
            
            
            
            646.5
            
            
            
            246.1Industrial
            
            
            417.3
            
            
            
            313.1
            
            
            
            580.9
            
            
            
            104.2
            
            
            
            (267.8
            )Transportation(1)
            
            
            37,073.2
            
            
            
            40,299.3
            
            
            
            39,202.2
            
            
            
            (3,226.1
            )
            
            
            1,097.1Other
            
            
            3,107.4
            
            
            
            5,356.8
            
            
            
            6,449.6
            
            
            
            (2,249.4
            )
            
            
            (1,092.8
            )83,881.0
            
            
            
            86,092.9
            
            
            
            84,198.3
            
            
            
            (2,211.9
            )
            
            
            1,894.6





(1)
            Customer-owned
      gas.





Due to
the sale of the PNM Gas business, which was completed on January 30, 2009, the
Company is reporting this segment as discontinued operations as required under
GAAP. Certain corporate items that historically were allocated to the PNM Gas
segment cannot be included as discontinued operations and were reassigned to PNM
Electric for 2007 and 2006.  These items include officer compensation,
depreciation on common utility and shared-service assets, and postage
costs.  The after-tax amount of costs reassigned in the years 2007 and
2006 totaled $6.4 million and $6.3 million.  Beginning in 2008, these
costs were reallocated among all PNMR business segments, other than PNM
Gas.





PNM Gas
purchased natural gas in the open market and sold it at no profit to its
sales-service customers. As a result, increases or decreases in gas revenues
driven by gas costs did not impact the gross margin or operating income of PNM
Gas. Increases or decreases to gross margin caused by changes in sales-service
volumes represented margin earned on the delivery of gas to customers based on
regulated rates.





Implementation
of an approved NMPRC rate increase resulted in an increase to revenues and gross
margin in 2007 and 2008.





In 2008,
a slight increase in the average customer count and a 2.0% increase in
heating-degree days, both of which were mostly offset by economic conditions,
resulted in increased revenues and gross margin.  In 2007, an increase
in the average customer count and a 4.4% increase in heating-degree days
increased sales volumes, revenues and gross margin.





During
the last two years, revenues from off-system activities decreased due to a lack
of market activity.  In 2007, the decrease in revenues was mostly
offset by decreases in costs related to these transactions, slightly increasing
gross margin and net earnings.  In 2008, the volume and margin on
these activities decreased.


A-41


In 2008,
operating expenses decreased due to reductions in shared service costs resulting
from the business improvement plan, along with a reduction for costs incurred in
2007 for self-insurance costs and severance and consulting costs associated with
the business improvement plan to reduce costs and improve processes in future
years.  In 2007, the increase in these costs were more than offset by
reductions in incentive-based compensation expenses.





Due to
the sale of the gas business, the assets held for sale have not been depreciated
in accordance with SFAS 144.  If PNM Gas were not treated as
discontinued operations, deprecation of $21.5 million would have been recorded
in 2008.





Changes
in other income and deductions are primarily due to interest on PGAC
balances.





Interest
charges are primarily allocated from PNM and increased in 2008 due to higher
borrowings at higher long-term rates.  In 2007, interest charges
increased due to higher short-term borrowings.





Altura





The table
below summarizes the operating results for Altura:





Year
      Ended December 31,2007
            
            
            2006
            
            
            Change(In
      millions)Total
      revenues
            
            $
            65.4
            
            
            $
            125.1
            
            
            $
            (59.7
            )Cost
      of energy
            
            
            22.1
            
            
            
            38.9
            
            
            
            (16.8
            )Gross margin
            
            
            43.3
            
            
            
            86.3
            
            
            
            (43.0
            )Operating
      expenses
            
            
            18.6
            
            
            
            13.0
            
            
            
            5.6Depreciation
      and amortization
            
            
            7.7
            
            
            
            13.1
            
            
            
            (5.4
            )Operating income
            
            
            17.0
            
            
            
            60.2
            
            
            
            (43.2
            )Interest
      income
            
            
            0.1
            
            
            
            0.3
            
            
            
            (0.2
            )Other
      income (deductions)
            
            
            -
            
            
            
            -
            
            
            
            -Net
      interest charges
            
            
            (8.5
            )
            
            
            (20.9
            )
            
            
            12.4Earnings before income taxes
            
            
            8.6
            
            
            
            39.6
            
            
            
            (31.0
            )Income
      taxes
            
            
            3.4
            
            
            
            15.7
            
            
            
            (12.3
            )Segment
      earnings
            
            $
            5.2
            
            
            $
            23.9
            
            
            $
            (18.7
            )





The table
below summarizes the significant changes to total revenues and gross
margin:





2007/2006
      ChangeTotal
            
            
            Cost
      of
            
            
            GrossRevenues
            
            
            Energy
            
            
            Margin(In
      millions)Timing
      of PNMR ownership
            
            $
            (57.2
            )
            
            $
            (15.8
            )
            
            $
            (41.4
            )Twin
      Oaks performance
            
            
            (2.5
            )
            
            
            (0.9
            )
            
            
            (1.6
            )Total increase (decrease)
            
            $
            (59.7
            )
            
            $
            (16.8
            )
            
            $
            (43.0
            )





Altura's
2006 results include approximately nine months of earnings associated with the
ownership of the Twin Oaks plant after its April 18 acquisition, including
allocations of corporate costs and interest expense associated with the $480
million bridge loan undertaken to fund the purchase of the plant.





Altura’s
2007 results were lower than 2006 primarily related to the contribution to Optim
Energy on June 1, 2007.  Forced outages in the first quarter of 2007
further reduced earnings, in addition to the impairment of the value of
developmental rights for the expansion of the plant.  See Note
2.  This decrease was partially offset by reduced interest expense
associated with the pay down of a significant portion of the bridge loan in late
2006.





A-42


First
Choice





The table
below summarizes the operating results for First Choice:





Year
      Ended December 31,
            
            Change2008
            
            2007
            
            2006
            
            2008/2007
            
            2007/2006(In
      millions)


Total
      revenues
            
            $
            582.2
            
            
            $
            600.7
            
            
            $
            584.9
            
            
            $
            (18.5
            )
            
            $
            15.8Cost
      of energy
            
            
            564.3
            
            
            
            500.8
            
            
            
            455.1
            
            
            
            63.5
            
            
            
            45.7Gross
      margin
            
            
            17.9
            
            
            
            99.9
            
            
            
            129.8
            
            
            
            (82.0
            )
            
            
            (29.9
            )Operating
      expenses
            
            
            238.4
            
            
            
            57.3
            
            
            
            66.9
            
            
            
            181.1
            
            
            
            (9.6
            )Depreciation
      and amortization
            
            
            2.4
            
            
            
            1.9
            
            
            
            2.0
            
            
            
            0.5
            
            
            
            (0.1
            )Operating
      income (loss)
            
            
            (222.8
            )
            
            
            40.8
            
            
            
            60.8
            
            
            
            (263.6
            )
            
            
            (20.0
            )Other
      income (deductions)
            
            
            1.7
            
            
            
            2.1
            
            
            
            2.1
            
            
            
            (0.4
            )
            
            
            -Net
      interest charges
            
            
            (4.0
            )
            
            
            (0.8
            )
            
            
            (0.8
            )
            
            
            (3.2
            )
            
            
            -Earnings
      (loss) before income taxes
            
            
            (225.1
            )
            
            
            42.1
            
            
            
            62.1
            
            
            
            (267.2
            )
            
            
            (20.0
            )Income
      taxes
            
            
            (47.6
            )
            
            
            14.9
            
            
            
            22.1
            
            
            
            (62.5
            )
            
            
            (7.2
            )


Segment
      earnings (loss)
            $
            (177.6)
            
            $
            27.2
            
            $
            40.0
            
            $
            (204.8)
            
            $
            (12.8)





The
following table summarizes the significant changes to total revenues, cost of
energy, and gross margin:





2008/2007
      Change
            
            
            2007/2006
      ChangeTotal
            
            
            Cost
      of
            
            
            Gross
            
            
            Total
            
            
            Cost
      of
            
            
            GrossRevenues
            
            
            Energy
            
            
            Margin
            
            
            Revenues
            
            
            Energy
            
            
            Margin(In
      millions)Weather
            
            $
            0.9
            
            
            $
            1.1
            
            
            $
            (0.2
            )
            
            $
            (9.9
            )
            
            $
            (7.4
            )
            
            $
            (2.5
            )Customer
      growth/usage
            
            
            (49.5
            )
            
            
            (37.2
            )
            
            
            (12.3
            )
            
            
            21.2
            
            
            
            26.4
            
            
            
            (5.2
            )Hurricane
      Ike
            
            
            (4.2
            )
            
            
            (0.9
            )
            
            
            (3.3
            )
            
            
            -
            
            
            
            -
            
            
            
            -Retail
      margins
            
            
            78.0
            
            
            
            94.1
            
            
            
            (16.1
            )
            
            
            20.0
            
            
            
            29.8
            
            
            
            (9.8
            )Trading
      margins
            
            
            (46.3
            )
            
            
            -
            
            
            
            (46.3
            )
            
            
            (12.9
            )
            
            
            -
            
            
            
            (12.9
            )Unrealized
      economic hedges
            
            
            2.6
            
            
            
            6.4
            
            
            
            (3.8
            )
            
            
            (2.6
            )
            
            
            (3.1
            )
            
            
            0.5Total
      increase (decrease)
            
            $
            (18.5
            )
            
            $
            63.5
            
            
            $
            (82.0
            )
            
            $
            15.8
            
            
            $
            45.7
            
            
            $
            (29.9
            )





The
following table shows First Choice operating revenues by customer class,
including intersegment revenues, and actual number of customers:





Year
      Ended December 31,
            
            
            Change2008
            
            
            2007
            
            
            2006
            
            
            
            2008/2007
            
            
            
            2007/2006(In
      millions, except customers)Residential
            
            $
            407.3
            
            
            $
            390.3
            
            
            $
            346.0
            
            
            $
            17.0
            
            
            $
            44.3Mass-Market
            
            
            52.7
            
            
            
            61.0
            
            
            
            81.9
            
            
            
            (8.3
            )
            
            
            (20.9
            )Mid-Market
            
            
            149.3
            
            
            
            141.6
            
            
            
            129.2
            
            
            
            7.7
            
            
            
            12.4Trading
      gains (losses)
            
            
            (49.9
            )
            
            
            (3.6
            )
            
            
            9.3
            
            
            
            (46.3
            )
            
            
            (12.9
            )Other
            
            
            22.8
            
            
            
            11.4
            
            
            
            18.5
            
            
            
            11.4
            
            
            
            (7.1
            )$
            582.2
            
            
            $
            600.7
            
            
            $
            584.9
            
            
            $
            (18.5
            )
            
            $
            15.8Actual
      customers (thousands) (1,2)
            
            
            237.4
            
            
            
            258.4
            
            
            
            253.7
            
            
            
            (21.0
            )
            
            
            4.7





(1)
            See
      note above in the TNMP Electric segment discussion about the impact of
      TECA.





(2)
            Due
      to the competitive nature of First Choice’s business, actual customer
      count at December 31 is presented in the table above as a more
      representative business indicator than the average customers that are
      shown in the table for TNMP
customers.


A-43


The
following table shows First Choice GWh electric sales by customer
class:





Year
      Ended December 31,
            
            
            Change2008
            
            
            2007
            
            
            2006
            
            
            
            2008/2007
            
            
            
            2007/2006(Gigawatt
      hours(1))Residential
            
            
            2,547.5
            
            
            
            2,796.9
            
            
            
            2,481.6
            
            
            
            (249.4
            )
            
            
            315.3Mass-Market
            
            
            278.3
            
            
            
            371.8
            
            
            
            549.1
            
            
            
            (93.5
            )
            
            
            (177.3
            )Mid-Market
            
            
            1,176.8
            
            
            
            1,197.3
            
            
            
            1,159.2
            
            
            
            (20.5
            )
            
            
            38.1Other
            
            
            16.3
            
            
            
            21.1
            
            
            
            20.9
            
            
            
            (4.8
            )
            
            
            0.24,018.9
            
            
            
            4,387.1
            
            
            
            4,210.8
            
            
            
            (368.2
            )
            
            
            176.3





(1)  See
note above in the TNMP Electric segment discussion about the impact of
TECA.





During
2008, a decrease in customers and lower MWh sales decreased segment earnings
compared to 2007.  Average retail sales prices have increased over the
three year period. Other revenues have also increased as a result of higher
miscellaneous fees in 2008 versus 2007.  However, contractual delays
in implementing price increases on fixed price term customer renewals,
coupled with contractual limitations on monthly price increases for floating
rate customers prevented First Choice from recouping the dramatic increase in
purchase power costs in 2008.  The customer renewal process has since
been automated and contractual limitations on monthly price increases have been
significantly changed to reduce First Choice’s exposure to future price
volatility.  The impact of Hurricane Ike resulted in lower sales and
resulted in an excess purchased power supply that had to be sold in the spot
market at prices less than cost, which decreased segment earnings.





A
decrease in trading margins from a $3.6 million loss in 2007 to a $49.9 million
loss in 2008 resulted in a $46.3 million decrease in gross margin compared to a
$12.9 million decrease in 2007/2006.  The losses in 2008 were
primarily the result of a series of speculative forward trades that arbitraged
basis differentials among certain ERCOT delivery zones.  Because of
continued market volatility and the concern that the forward basis market would
continue to deteriorate, First Choice ended any further speculative
trading.  No significant additional costs are expected related to
speculative trading.





Losses on
unrealized economic hedges represent unrealized fair value estimates related to
forward energy contracts and are not necessarily indicative of the amounts that
will be realized upon settlement.





Impairment
of goodwill of $88.8 million, the First Choice trade name of $42.6 million, and
the First Choice customer list of $4.8 million pre-tax (aggregating $119.6
million after-tax) were recorded in 2008 as a result of impairment assessments
required under SFAS 142.  (See Note 25).





The
allowance for uncollectible accounts and related bad debt expense is based on
collections and write-off experience.  Due to macroeconomic
conditions, higher average final bills, and an increase in customer churn, the
default rates experienced late in 2008 rose significantly.  In
response to this, bad debt expense increased, which reduced segment earnings by
$36.7 million in 2008 compared to 2007.Management of
First Choice is currently addressing the bad debt situation by undertaking
several initiatives in 2009 to reduce bad debt expense.  These initiatives
include efforts to reduce the default rate experienced for customers
switching to another REP combined with renewed focus on identifying new
customer prospects, who are more likely to demonstrate desired payment
behavior.  In addition, possible regulatory changes are under
discussion with the PUCT that would impede a customer's ability to switch
REPs until past due balances are paid.





Increased
operational costs, which include expenses related to customer acquisition and
services, as well as shared services, employee labor, pension and benefits,
resulted in a decrease to segment earnings when comparing 2008 to
2007.





A-44


Corporate
and Other





The table
below summarizes the operating results for Corporate and Other:





Year
      Ended December 31,
            
            Change2008
            
            2007
            
            2006
            
            2008/2007
            
            2007/2006(In
      millions)


Total
      revenues
            
            $
            (55.9
            )
            
            $
            (69.5
            )
            
            $
            (119.1
            )
            
            $
            13.5
            
            
            $
            49.7Cost
      of energy
            
            
            (55.2
            )
            
            
            (69.5
            )
            
            
            (119.8
            )
            
            
            14.3
            
            
            
            50.3Gross
      margin
            
            
            (0.7
            )
            
            
            -
            
            
            
            0.7
            
            
            
            (0.8
            )
            
            
            (0.6
            )Operating
      expenses
            
            
            (0.4
            )
            
            
            6.9
            
            
            
            8.3
            
            
            
            (7.4
            )
            
            
            (1.4
            )Depreciation
      and amortization
            
            
            17.6
            
            
            
            12.5
            
            
            
            6.0
            
            
            
            5.1
            
            
            
            6.5Operating
      income (loss)
            
            
            (17.9
            )
            
            
            (19.4
            )
            
            
            (13.7
            )
            
            
            1.5
            
            
            
            (5.7
            )Equity
      in net earnings (loss) of Optim Energy
            
            
            (29.7
            )
            
            
            7.6
            
            
            
            -
            
            
            
            (37.3
            )
            
            
            7.6Other
      income (deductions)
            
            
            (7.9
            )
            
            
            (6.4
            )
            
            
            (0.3
            )
            
            
            (1.5
            )
            
            
            (6.1
            )Net
      interest charges
            
            
            (40.8
            )
            
            
            (33.0
            )
            
            
            (36.4
            )
            
            
            (7.7
            )
            
            
            3.4Earnings
      (loss) before income taxes
            
            
            (96.3
            )
            
            
            (51.3
            )
            
            
            (50.4
            )
            
            
            (45.0
            )
            
            
            (0.9
            )Income
      taxes
            
            
            (44.4
            )
            
            
            (37.0
            )
            
            
            (21.2
            )
            
            
            (7.4
            )
            
            
            (15.8
            )


Segment
      earnings (loss)
            $
            
            (51.9)
            
            $
            (14.3
            )
            
            $
            (29.2)
            
            $
            
            (37.6
            )
            $
            
            14.9





The
Corporate and Other Segment includes consolidation eliminations of operating
revenues and cost of energy between business segments.  TNMP’s New
Mexico operations were transferred to PNM on January 1, 2007, reducing the
amount of intersegment revenue and cost of energy to be eliminated in this
segment.  Corporate and Other
intersegment revenue and cost of energy also includes the consolidation
elimination of transactions between TNMP and FCP related to TNMP’s sale of
transmission services to First Choice.





Operating
expenses decreased $7.4 million in 2008 compared to 2007 and $1.4 million in
2007 compared to 2006.  The decreases include an offset to
depreciation expense described below.  Operating expenses in 2008 and
2007 also include a credit related to the elimination of operating lease expense
paid by PNM to PNMR related to a portion of PVNGS Unit 2, which was purchased in
the 3rd quarter
of 2007, contributing a favorable variance of $4.8 million in 2008 compared to
2007 as well as 2007 compared to 2006. Operating expenses includes a $3.1
million loss in 2007 related to the contribution of Altura to Optim
Energy.  In addition, 2007 includes $2.8 million related to Optim
Energy formation costs, which were comparable to 2006
costs.  Favorable variances are offset partially by severances and
consulting charges related to the business improvement plan in the amount of
$3.1 million in 2008 compared to 2007 and $6.9 million in 2007 compared to
2006.  Favorable variances were also partially offset by higher
consulting and legal costs related to the sale of PNM Gas in the amount of $3.4
million in 2008 compared to 2007 and $2.0 million in 2007 compared to
2006.





Depreciation
expense increased $5.1 million 2008 compared to 2007 and $6.5 million 2007
compared to 2006.  These increases include $2.9 million and $4.3
million respectively, related to increased depreciation on shared services asset
base, which is offset in operating expenses in the Corporate and Other segment
as a result of allocation of these costs to other business
segments.  The remaining increase is due to depreciation on a portion
of PVNGS Unit 2, which was purchased in the 3rd quarter
of 2007 and is leased to PNM.





Corporate
and Other results include earnings associated with Optim
Energy.  Further explanation of equity in Optim Energy is shown
below.





Other
income and deductions increased 2007 compared to 2006 primarily due to the
absence in 2007 of $1.2 million of gains associated with a PNMR revolver
interest rate swap that was settled in 2006, as well as the amortization of $4.1
million for a wind energy investment in 2007.  In addition, increases
in 2008 and 2007 include the effects of the elimination of interest income
associated with the PVNGS lessor notes in the amount of $2.0
million.





A-45


Optim
Energy





The table
below summarizes the operating results for Optim Energy:





Year Ended December 31,2008
            
            
            2007
            
            
            Change(In
      millions)Total
      operating revenues
            
            $
            472.7
            
            
            $
            224.3
            
            
            $
            248.4Cost
      of energy
            
            
            366.5
            
            
            
            147.3
            
            
            
            219.2Gross
      margin
            
            
            106.2
            
            
            
            77.0
            
            
            
            29.2Operating
      expenses
            
            
            117.8
            
            
            
            33.5
            
            
            
            84.3Depreciation
      and amortization
            
            
            30.5
            
            
            
            15.6
            
            
            
            14.9Operating
      income (loss)
            
            
            (42.1
            )
            
            
            27.9
            
            
            
            (70.0
            )Other
      income
            
            
            0.7
            
            
            
            0.6
            
            
            
            0.1Net
      interest charges
            
            
            (19.2
            )
            
            
            (17.9
            )
            
            
            (1.3
            )Earnings
      (loss) before income taxes
            
            
            (60.6
            )
            
            
            10.6
            
            
            
            (71.2
            )Income
      tax (benefit) on margin
            
            
            (0.1
            )
            
            
            0.4
            
            
            
            (0.5
            )Net
      earnings (loss)
            
            $
            (60.5
            )
            
            $
            10.2
            
            
            $
            (70.7
            )50
      percent of net earnings (loss)
            
            $
            (30.2
            )
            
            $
            5.1
            
            
            $
            (35.3
            )Plus
      amortization of basis difference in Optim Energy
            
            
            0.5
            
            
            
            2.5
            
            
            
            (2.0
            )PNMR
      Equity in net earnings of Optim Energy
            
            $
            (29.7
            )
            
            $
            7.6
            
            
            $
            (37.3
            )





Power
sales and purchases are included net in operating revenues.  Gas sales and
purchases are included net in cost of sales.  Financial transactions are
presented on a net basis in revenue for power and on a net basis in cost of
sales for gas.  Certain of these transactions were presented on a
gross basis during interim periods of 2008.





Results
of operation for Optim Energy primarily include the earnings from the Altura
(Twin Oaks) and Altura Cogen generation stations since the contribution and
acquisition of these facilities.  Altura was contributed to Optim
Energy on June 1, 2007 and Optim Energy acquired Altura Cogen on August 1,
2007.  Both the generation stations had strong performance during the
year, with both plants improving over 2007.  2008 contained additional
margin over 2007 and related operating costs in 2008 compared to 2007, primarily
related to having only a half year of operations in 2007.





Management
evaluates the results of operation of Optim Energy on an earnings before
interest, income taxes, depreciation, and amortization (“EBITDA”)
basis.  In this evaluation of Optim Energy, management also excludes
purchase accounting amortization included in gross margin related to contracts
and emission allowances that was recorded in accordance with SFAS
141.  SFAS 141 requires that Optim Energy individually value each
asset and liability received in the Altura and Altura Cogen transactions and
initially record them on its balance sheet at the determined fair
value.  For both transactions, this results in a significant amount of
amortization for contracts acquired that were out of market and emission
allowances, that while acquired from government programs without cost to the
plants, have significant market value.  Amortization related to out of
market contracts increased the above total operating revenues by $2.2 million in
2008.  Amortization for out of market contracts will continue through
the expiration of each contract, which is 2010 for Altura and 2021 for Altura
Cogen.  In addition, 2008 cost of energy includes $11.2 million of
amortization related to emission allowances acquired in the 2007
transactions.  The amortizations for emission allowances will be
recorded as the allowances are used in plant operations, sold or
expire.





In July
2008, a federal appeals court ruling by the U.S. Court of Appeals for the
District of Columbia Circuit Court invalidated CAIR.  This ruling
appeared to remove the need for emissions allowance credits under the CAIR
program. However in December 2008, CAIR was temporarily reinstated by the
courts. Optim Energy has emission allowance inventory from the purchase of
Altura Cogen and contribution of Altura, a portion of which falls under the CAIR
program.  In 2008, Optim Energy recorded a pre-tax write off, included
in operating expenses, of $31.7 million for all inventory held under the CAIR
program.  As of December 31, 2008, Optim Energy has $115.9 million
remaining in inventory for emission allowances not granted under the CAIR
program.


A-46


The
assets of Altura transferred to Optim Energy included the development rights for
a possible 600-megawatt expansion of the Twin Oaks plant, which was classified
as an intangible asset.  Optim Energy made a strategic decision not to
pursue the Twin Oaks expansion at this time and wrote off the development rights
as an impairment of intangible assets amounting to $21.8 million in the second
quarter of 2008. In addition $1.2 million of deferred costs related to this
project were written off as administrative and general expense.





Optim
Energy has a hedging program that covers a multi-year period.  The
level of hedging at any given time varies depending on current market conditions
and other factors.  Economic hedges that do not qualify for or are not
designated as cash flow hedges or normal purchases/sales under SFAS 133 are
derivative instruments that are required to be marked to market.  Due
to the extreme market volatility experienced in the first quarter of 2008 in the
ERCOT market, Optim Energy made the decision to exit the speculative trading
business and close out the speculative trading positions.  In May
2008, Optim Energy closed out all remaining speculative
positions.  Optim Energy recognized speculative trading losses of $2.4
million in the first quarter of 2008.  No additional costs are
expected related to speculative trading.





The
contribution of Altura created a basis difference between PNMR’s recorded
investment in Optim Energy and 50 percent of Optim Energy’s
equity.  The PNMR net earnings impact shown below does not equal 50
percent of the Optim Energy amortization because of this basis
difference.  While the portion of the basis difference related to
contract amortization will only continue through 2010, other basis differences,
including a difference related to emission allowances, will continue to exist
through the life of the Altura plant.  For 2008 and 2007, the basis
difference adjustment detailed above relates primarily to contract amortization
with insignificant offsets related to the other minor basis difference
components.





On
January 6, 2009, LCC filed for bankruptcy protection under Chapter 11 of the US
Bankruptcy Code.  LCC is Optim Energy’s counterparty in several
agreements, and is a major customer of Optim Energy.  In addition, LCC
leases Optim Energy the land for the Altura Cogen facility and provides other
services, including water, to that facility.  The net amount due from
LCC as of year-end has been fully reserved.  LCC has continued to
perform under the existing contracts and Optim Energy believes that LCC will
continue to perform under the existing contracts.





LIQUIDITY
AND CAPITAL RESOURCES





Statements
of Cash Flows





The
information concerning PNMR’s cash flows is summarized as follows:





Year
      Ended December 31,
            
            
            Change2008
            
            
            2007
            
            
            2006
            
            
            
            2008/2007
            
            
            
            2007/2006(In
      millions)Net
      cash flows from:
              Operating
      activities
            
            $
            88.1
            
            
            $
            222.5
            
            
            $
            244.4
            
            
            $
            (134.4
            )
            
            $
            (21.9
            )Investing
      activities
            
            
            (320.7
            )
            
            
            (73.5
            )
            
            
            (799.6
            )
            
            
            (247.2
            )
            
            
            726.1Financing
      activities
            
            
            355.5
            
            
            
            (254.6
            )
            
            
            610.4
            
            
            
            610.1
            
            
            
            (865.0
            )Net
      change in cash and cash equivalents
            
            $
            122.9
            
            
            $
            (105.6
            )
            
            $
            55.2
            
            
            $
            228.5
            
            
            $
            (160.8
            )





The
changes in PNMR’s cash flows from operating activities reflects lower earnings
primarily due to results of operations and increased margin calls at First
Choice in 2008. Higher coal and purchased power costs in 2007 were partially
offset by higher customer growth and pricing at PNM and First Choice and an
income tax refund at TNMP in 2007. Other significant changes in cash flow
included settlements in 2007 of 2006 TNMP liabilities to REPs related to retail
competition in Texas as ordered under TECA, higher incentive based compensation
payouts in 2007, and five months of cash flows from Twin Oaks in 2007 versus
nine months in 2006. In 2006, PNMR also benefited from retail load growth, an
increase in cash collections of net receivables related to higher than normal
gas




A-47


and
market prices at the end of 2005.  Lower interest payments in 2007
compared to 2008 and 2006 also contributed to the changes.





The
changes in cash flows from investing activities reflects the acquisition of Twin
Oaks in 2006 and the subsequent contribution of Altura resulting in net cash
distributions to PNMR from Optim Energy in 2007 (See Note 22). In addition,
higher expenditures for utility plant additions in 2007 compared to 2008 and
2006, including the purchase of assets underlying a portion of PVNGS leased by
PNM (See Note 2), expansion of Afton, environmental upgrades at SJGS, and higher
purchases of nuclear fuel for PVNGS contributed to the changes.





Cash
flows from financing activities in 2006 is driven by increased common stock
issuances to fund construction.  In addition, short-term debt
increased in 2006 for financing the acquisition of Twin Oaks, which was repaid
in 2006 and 2007.  Cash flows from financing activities in 2007 were
also driven by the redemption of long-term debt by TNMP partially offset by the
issuance of PCRBs by PNM. In 2008, the issuance of common stock by PNMR in
connection with the settlement of equity purchase obligations of the holders of
publicly held equity-linked units and the issuance of long-term debt by PNMR and
PNM was partially offset by the redemption of long-term debt by PNM. At TNMP,
the redemption of long-term debt was offset by new short-term borrowings in
2008. Cash flows from financing activities were primarily used to fund
construction expenditures as well as strengthen the Company’s liquidity
position.





Financing
Activities





See Note
6, for additional information concerning the Company’s financing
activities.





On March
7, 2008, TNMP entered into a $150.0 million short-term loan agreement with two
lenders.  On April 9, 2008, TNMP borrowed $150.0 million under this
agreement and used the proceeds to redeem the remaining $148.9 million of its
6.125% senior unsecured notes prior to the maturity date of June 1,
2008.  The $150.0 million borrowing under this agreement was repaid in
October 2008, through borrowing under the TNMP Facility.





On May 5,
2008, PNM entered into the Term Loan Agreement that would mature on April 30,
2009 in an aggregate principal amount of up to $300.0 million, which capacity
was reduced to $150.0 million on May 28, 2008.  On May 8, 2008, PNM
entered into the $100.0 million Reimbursement Agreement, which allowed PNM to
obtain standby letters of credit up to the aggregate amount of $100.0 million at
any time prior to April 30, 2009.  Upon the sale of PNM Gas on January
30, 2009, the Term Loan Agreement and the Reimbursement Agreement were
terminated.  No borrowings were made and no letters of credit were
issued under these arrangements.





On May
15, 2008, TNMP entered into a credit agreement with eight lenders for the TNMP
Facility, which matures on May 13, 2009.  The TNMP Facility currently
provides TNMP with a revolving credit facility for up to $200.0
million.  In connection with entering into the TNMP Facility, TNMP
withdrew as a borrower under the PNMR Facility and is no longer a party under
the PNMR Facility.





In May
2008, PNM issued $350.0 million of senior unsecured notes and PNMR remarketed
the senior unsecured notes component of its publicly held equity-linked
units.  The proceeds from the remarketed senior notes amounted to
$247.3 million and were utilized by the holders of the equity-linked units to
satisfy their obligations to purchase 9,403,412 shares of PNMR’s common stock
for the same aggregate amount on May 16, 2008.  In connection with the
remarketing, PNMR issued an additional $102.7 million of new senior unsecured
notes for an aggregate offering of $350.0 million.




On
October 31, 2008, TNMP entered into the $100.0 million TNMP Bridge Facility to
provide an additional source of funds that would be available in order to repay
TNMP’s $167.7 million of senior unsecured notes that matured January 15,
2009.  On January 14, 2009, TNMP borrowed $100.0 million under the
TNMP Bridge Facility.  The amount drawn is due March 30,
2009.  On January 15, 2009, TNMP repaid the entire principal and
interest due on the $167.7 million principal amount outstanding of 6.25% senior
unsecured notes utilizing the proceeds from the TNMP Bridge Facility and
inter-company borrowings from PNMR.  TNMP is currently exploring
alternatives for refinancing the TNMP Bridge Facility.




A-48


In
November 2008, PNMR issued 477,800 shares of its Series A convertible preferred
stock in satisfaction of the obligations of the holder of PNMR’s privately held
equity-linked units to purchase PNMR equity securities.  In exchange
for issuing this preferred stock, the holder tendered to PNMR $100.0 million of
senior unsecured notes that were part of the original equity-linked
units.  PNMR retired the tendered notes thereby reducing outstanding
long-term debt.





On
January 5, 2009, PNMR commenced a tender offer whereby it offered to repurchase
a portion of its 9.25% senior unsecured notes due 2015.  On February
5, 2009, PNMR repurchased and retired $157.0 million in aggregate principal
amount of these notes for $146.0 million, plus accrued interest.  From
the proceeds of the sale of PNM Gas, PNM paid a dividend of $220.0 million to
PNMR on February 5, 2009, a portion of which was used to fund the note
repurchase.  On February 26, 2009, PNMR purchased an additional $0.4
million of the 9.25% senior unsecured notes at 93% of face value in a private
transaction.





As
discussed in Note 2, on January 12, 2008, PNM reached a definitive agreement to
sell its natural gas operations, which comprise the PNM Gas
segment.  The sale was completed on January 30, 2009.  PNM
used  the proceeds of approximately $640 million, including a
preliminary adjustment for the level of working capital at closing, to retire
short-term debt and pay the dividend to PNMR described above.  The
remaining funds were invested in a money market fund and will be used to pay
income taxes on the gain from the sale.




Capital
Requirements





Total
capital requirements consist of cash dividend requirements for both common and
preferred stock and construction expenditures.  On August 11, 2008,
the Board declared a regular quarterly dividend on common stock of $0.125 per
share. PNMR’s indicated annual dividend rate is $0.50 per share. The Board also
declared regular quarterly dividends on common stock of $0.125 per share on
September 16, 2008, December 9, 2008 and February 17, 2009.  Beginning
with the dividend declared on December 9, 2008, the Series A convertible
preferred stock is entitled to receive dividends equivalent to any dividends
paid on PNMR common stock as if the preferred stock had been converted into
common stock.  The main focus of PNMR’s current construction program
is upgrading generation resources, including pollution control equipment,
upgrading and expanding the electric transmission and distribution systems, and
purchasing nuclear fuel.  Projections for total capital requirements
for 2009 are $350.9 million, including construction expenditures of $304.8
million.  Total capital requirements for the years 2009-2013 are
projected to be $1,617.0 million, including construction expenditures of
$1,386.5 million.  See Commitments and Contractual Obligations
below.  This projection includes $18.0 million for completion of the
SJGS environmental project to install low NOX combustion control and mercury
reduction technologies, as well as equipment to increase SO2
controls.  These amounts do not include forecasted construction
expenditures of Optim Energy.  These estimates are under continuing
review and subject to on-going adjustment, as well as to Board review and
approval.





During
the year ended December 31, 2008, PNMR utilized cash generated from operations
and cash on hand, as well as its liquidity arrangements and additional debt
financings, to meet its capital requirements and construction
expenditures.





TNMP had
$167.7 million in senior unsecured notes that matured and were repaid in January
2009 as described below. PNM has $36.0 million of PCRBs that will be remarketed
in July 2009.  PNMR and its subsidiaries have no other long-term debt
that comes due prior to 2016, except for $11.3 million that is due in
installments through 2013.





As discussed in Note 22,
Optim Energy is co-developing a generating unit for which its share of the
construction costs is anticipated to be approximately $215 million, including
financing costs, of which $93.0 million has been expended through December 31,
2008.PNMR currently anticipates that the remaining amounts of
financing for this project will be obtained from Optim Energy’s
operations or Optim
Energy’s credit facility.  To the extent Optim Energy’s
credit facility should be insufficient to finance the current projects, PNMR and
ECJV may, at their option, provide additional funds to Optim
Energy.  Likewise, if Optim Energy
undertakes additional projects, which require funds that would exceed the
capacity of its current credit facility and Optim Energy is
unable to obtain additional financing capabilities, PNMR and ECJV may be asked
to provide additional funding, but such funding would be at the option of PNMR
and ECJV.  PNMR is unable to predict if additional funding will be
required or, if




A-49


required,
the amount or timing of additional funds that would be provided to Optim
Energy.





Liquidity





As of
February 20, 2009, the Company had short-term debt outstanding of $472.7
million.  This amount includes borrowings under the TNMP Bridge
Facility and the TNMP Facility, which mature on March 30, 2009 and May 13,
2009.  In addition, the Company has long-term debt aggregating $36.0
million that is subject to mandatory repurchase and remarketing prior to
December 31, 2009.  The Company is exploring financial alternatives to
meet these obligations.  On February 26, 2009, the Finance Committee of
thePNMR Board authorized
PNMR to provide support for the debt of TNMP by approvingone or
more additional loans to TNMP as a contingency in the event TNMP is unable to
obtain external financing sufficient to pay amounts borrowed under the TNMP
Facility and the TNMP Bridge Facility when they come due.





Although
accessing the capital markets at the current time could be difficult as well as
costly, the Company currently believes that its internal cash generation,
existing credit arrangements, and access to public and private capital markets
will provide sufficient resources to meet the Company’s capital requirements and
retire or refinance its debt at maturity.  To cover the difference in
the amounts and timing of cash generation and cash requirements, the Company
intends to use short-term borrowings under its current and future liquidity
arrangements.  However, if the current market difficulties continue
for an extended period of time or worsen, the Company may not be able to access
the capital markets or renew credit facilities when they expire.  In
such event, the Company would seek to improve cash flows by reducing capital
expenditures and PNM would consider seeking authorization for the issuance of
first mortgage bonds in order to improve access to the capital markets, as well
as any other alternatives that may remedy the situation at that
time.





In
addition to cash received from the sale of PNM Gas and its internal cash
generation, the Company anticipates that it will be necessary to obtain
additional long-term financing in the form of debt refinancing, new debt
issuances, and/or new equity in order to fund its capital requirements during
the 2009-2013 period.





The
Company’s ability, if required, to access the capital markets at a reasonable
cost and to provide for other capital needs is largely dependent upon its
ability to earn a fair return on equity, its results of operations, its credit
ratings, its ability to obtain required regulatory approvals and conditions in
the financial markets.





On April
18, 2008, S&P lowered the credit ratings for PNMR, PNM, and TNMP and placed
them on negative outlook for possible additional downgrades.  On May
6, 2008, S&P again lowered the credit ratings for PNMR, PNM, and TNMP and
the outlook was changed to stable for all entities.  On April 25,
2008, Moody’s lowered the credit ratings for PNMR and PNM and continued a review
for possible downgrade, while reaffirming TNMP’s ratings with a negative
outlook.  On May 23, 2008, Moody’s changed the outlook for PNMR and
PNM from rating under review for possible downgrade to negative
outlook.  On December 9, 2008, S&P changed the outlook for PNMR,
PNM, and TNMP from stable to negative.  The ratings actions have
increased borrowing costs for PNMR and PNM and could increase future borrowing
costs for PNMR, PNM, and TNMP. In addition, certain contractual arrangements
required that following downgrades the Company obtain commercial insurance for
risks that were previously self-insured.  On October 2, 2008, Fitch
Ratings announced credit ratings for PNMR, PNM, and TNMP.  As of
February 20, 2009, ratings on the Company’s securities were as
follows:


A-50





PNMR
            
            PNM
            
            TNMPS&PSenior
      unsecured notes
            BB-
            
            BB+
            
            BB+Commercial
      paper
            B-2
            
            B-2
            
            *Preferred
      stock
            *
            
            B
            
            *Moody’sSenior
      unsecured notes
            Ba2
            
            Baa3
            
            Baa3Commercial
      paper
            NP
            
            P-3
            
            *Preferred
      stock
            *
            
            Ba2
            
            *Fitch
      RatingsSenior
      unsecured notes
            BB
            
            BB+
            
            BBB-Secured
      PCRBs
            *
            
            BBB-
            
            *Short-term
      borrowings
            BB
            
            BB+
            
            BBB-Preferred
      stock
            *
            
            BB
            
            *





*  Not
applicable





Investors
are cautioned that a security rating is not a recommendation to buy, sell or
hold securities, that it is subject to revision or withdrawal at any time by the
assigning rating organization, and that each rating should be evaluated
independently of any other rating.





Liquidity
arrangements include the PNMR Facility and the PNM Facility, both of which
primarily expire in 2012, the TNMP Bridge Facility, which expires on March 30,
2009, and the TNMP Facility, which expires May 13, 2009.  These
facilities provide short-term borrowing capacity and the revolving credit
facilities also allow letters of credit to be issued, which reduce the available
capacity under the facilities.  Both PNMR and PNM also have lines of
credit with local financial institutions.





PNMR has
a commercial paper program under which it may issue commercial paper for up to
270 days and PNM has a commercial paper program under which it may issue
commercial paper for up to 365 days.  The Company has suspended the
commercial paper programs due to market conditions, no commercial paper has been
issued since March 11, 2008, and none is outstanding.


A-51


A summary
of these arrangements as of February 20, 2009 is as follows:





PNMR
            
            
            PNM
            
            
            TNMP
            
            
            PNMRSeparate
            
            
            Separate
            
            
            Separate
            
            
            Consolidated(In
      millions)Financing
      Capacity:Revolving
      credit facility
            
            $
            600.0
            
            
            $
            400.0
            
            
            $
            200.0
            
            
            $
            1,200.0Bridge
      facility
            
            
            -
            
            
            
            -
            
            
            
            100.0
            
            
            
            100.0Local
      lines of credit
            
            
            10.0
            
            
            
            8.5
            
            
            
            -
            
            
            
            18.5Total
      financing capacity
            
            $
            610.0
            
            
            $
            408.5
            
            
            $
            300.0
            
            
            $
            1,318.5Commercial
      paper program maximum
            
            $
            400.0
            
            
            $
            300.0
            
            
            
            -
            
            
            $
            700.0Amounts
      outstanding as of February 20, 2009:Commercial
      paper program
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -Revolving
      credit facility
            
            
            222.7
            
            
            
            -
            
            
            
            150.0
            
            
            
            372.7Bridge
      facility
            
            
            -
            
            
            
            -
            
            
            
            100.0
            
            
            
            100.0Local
      lines of credit
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Total
      short-term debt outstanding
            
            
            222.7
            
            
            
            -
            
            
            
            250.0
            
            
            
            472.7Letters
      of credit
            
            
            85.8
            
            
            
            26.9
            
            
            
            1.5
            
            
            
            114.2Total
      short term-debt and letters of credit
            
            $
            308.5
            
            
            $
            26.9
            
            
            $
            251.5
            
            
            $
            586.9Remaining
      availability as of February 20, 2009
            
            $
            301.5
            
            
            $
            381.6
            
            
            $
            48.5
            
            
            $
            731.6Cash
      and cash equivalents as of February 20, 2009
            
            $
            5.9
            
            
            $
            102.7
            
            
            $
            -
            
            
            $
            108.6





The above
table excludes intercompany debt.  The remaining availability under
the revolving credit facilities varies based on a number of factors, including
the timing of collections of accounts receivables and payments for construction
and operating expenditures.   The above availability includes
$23.5 million that represents the unfunded portion of the PNMR Facility
attributable to LBB.





For
offerings of debt and equity securities registered with the SEC, PNMR has two
effective shelf registration statements, one expiring in August 2009 for equity
and one expiring in April 2011 for debt.  These shelf registration
statements have unlimited availability and can be amended to include additional
securities, subject to certain restrictions and limitations.





PNMR can
also offer new shares of PNMR common stock through the PNM Resources Direct Plan
beginning in June 2006.  In addition, PNMR can offer and sell up to
8.0 million shares of PNMR common stock (but not more shares than needed for the
aggregate gross proceeds from such sales to reach $200.0 million) pursuant to an
equity distribution agreement.  PNMR has suspended the equity
distribution agreement due to market conditions.  Through December 31,
2008, PNMR had sold a combined total of 2.4 million shares of its common stock
through the PNMR Direct Plan and the equity distribution agreement for net
proceeds of $61.2 million, at a weighted average price of $25.94.





In April
2008, PNM filed a new shelf registration statement for the issuance of up to
$750.0 million of senior unsecured notes that was declared effective on April
29, 2008.  As of February 20, 2009, PNM had $600.0 million of
remaining unissued securities registered under this and a prior shelf
registration statement.


A-52


As
discussed above and in Note 6, the recent disruption in the current credit
markets has had a significant adverse impact on a number of financial
institutions and several of the financial institutions that the Company deals
with have been impacted. However, at this point in time, the Company’s liquidity
has not been materially impacted by the current credit environment and
management does not expect that it will be materially impacted in the
near-future.





Information
concerning PNMR’s common stock, dividends, and recent financing activities is
set forth above as well as in Note 5 and Note 6.





Off-Balance
Sheet Arrangements





PNMR’s
off-balance sheet arrangements include PNM’s operating lease obligations for
PVNGS Units 1 and 2, the EIP transmission line and the entire output of Delta, a
132 MW gas-fired generating plant.





In 1985
and 1986, PNM consummated sale and leaseback transactions for its interest in
PVNGS Units 1 and 2. The original purpose of the sale-leaseback financing was to
lower revenue requirements and to levelize the ratemaking impact of PVNGS being
placed in-service.  The lease payments reflected lower capital costs
as the equity investors were able to capitalize the investment with greater
leverage than PNM and because the sale transferred tax benefits that PNM could
not fully utilize.  Under traditional ratemaking, the capital costs of
ownership of a major rate base addition, such as a nuclear plant, are front-end
loaded.  The revenue requirements are high in the initial years and
decline over the life of the plant as depreciation occurs.  On the
other hand, the lease payments are level over the lease term.  The
leases, which expire in 2015 and 2016, contain options to renew the leases or to
purchase the property for fair market value at the end of the lease
terms.  PNM is analyzing this matter, to determine which option or
options to pursue.





Additionally,
in 1996, PNM entered into an operating lease agreement for the rights to all the
output of the Delta generating plant for 20 years.  The gas turbine
generating unit is operated by Delta, which is a variable interest
entity.  See Note 9.  The plant is mainly used as a peaking
plant to meet peak load requirements.





These
arrangements help ensure PNM the availability of lower-cost generation needed to
serve customers.





For
reasons similar to the above, PNM built the EIP Transmission Line and sold it in
sale and leaseback transactions in 1985.  The EIP line is 216 miles
long and runs from near Albuquerque to the Texas-New Mexico
border.  It is a 345 kilovolt line with a capacity of 200 MW and is
one of two interconnections in New Mexico linking the Western regional
electrical grid with the West Texas grid.  PNM currently owns 60% and
operates 40% of the EIP line under the terms of a lease agreement extending into
2015 with renewal and a fair market value purchase option.





In
addition to operating costs, PNM is required to make payments under these
leases.  The future lease payments shown below for the PVNGS and EIP
leases have been reduced by amounts that will be returned to PNM through its
ownership in related lessor notes.  See Investments in Note 1 and Note
7.





DeltaPVNGS(a)
            
            
            
            
            
            PersonUnits
      1&2
            
            
            EIP
            
            
            PPA
            
            
            Total(In
      thousands)2009
            
            $
            16,434
            
            
            $
            59
            
            
            $
            5,956
            
            
            $
            22,4492010
            
            
            15,249
            
            
            
            112
            
            
            
            5,956
            
            
            
            21,3172011
            
            
            16,071
            
            
            
            54
            
            
            
            5,956
            
            
            
            22,0812012
            
            
            27,853
            
            
            
            1,196
            
            
            
            5,956
            
            
            
            35,0052013
            
            
            30,357
            
            
            
            2,845
            
            
            
            5,956
            
            
            
            39,158Thereafter
            
            
            60,178
            
            
            
            4,267
            
            
            
            39,209
            
            
            
            103,654Total
            
            $
            166,142
            
            
            $
            8,533
            
            
            $
            68,989
            
            
            $
            243,664





(a)  Included
in PVNGS lease payments above are lease payments to PNMR of approximately $2.5
million




A-53


per year,
totaling $20.2 million for the contract life, net of amounts returned to PNM
through payments on the PVNGS lessor notes.





See
Sources of Power and Note 7 for additional information.





Commitments
and Contractual Obligations





The
following table sets forth PNMR’s long-term contractual obligations as of
December 31, 2008. See also Note 7 for further details about the Company’s
significant leases, including those for PNM and TNMP:





Payments
      Due2014
      andContractual
      Obligations
            
            2009
            
            
            
            2010
      -2011
            
            
            
            2012
      - 2013
            
            
            Thereafter
            
            
            Total(In
      thousands)Long-term
      debt (a)
            
            $
            205,694
            
            
            $
            4,377
            
            
            $
            4,917
            
            
            $
            1,369,870
            
            
            $
            1,584,858Interest
      on long-term debt (b)
            
            
            107,657
            
            
            
            201,585
            
            
            
            201,044
            
            
            
            548,824
            
            
            
            1,059,110Operating
      leases (g)
            
            
            29,644
            
            
            
            57,364
            
            
            
            87,624
            
            
            
            100,956
            
            
            
            275,588PPAs
      (e)
            
            
            23,523
            
            
            
            28,651
            
            
            
            14,641
            
            
            
            21,843
            
            
            
            88,658Coal
      contracts (c)
            
            
            56,419
            
            
            
            117,065
            
            
            
            122,554
            
            
            
            233,281
            
            
            
            529,319Outsourcing
            
            
            22,468
            
            
            
            46,404
            
            
            
            44,488
            
            
            
            8,746
            
            
            
            122,106Pension
      and retiree medical (f)
            
            
            2,833
            
            
            
            66,925
            
            
            
            110,029
            
            
            
            -
            
            
            
            179,787Other
      purchase obligations (d)
            
            
            304,800
            
            
            
            587,900
            
            
            
            493,800
            
            
            
            -
            
            
            
            1,386,500Total
      (h)
            
            $
            753,038
            
            
            $
            1,110,271
            
            
            $
            1,079,097
            
            
            $
            2,283,520
            
            
            $
            5,225,926





(a)
            Represents
      total long-term debt, including $167.7 million repaid in January 2009 and
      $36.0 million that is subject to mandatory repurchase and remarketing on
      July 1, 2009, but excluding unamortized discount of $0.2
      million.


(b)
            Represents
      interest payments during the
period.


(c)
            Represents
      only certain minimum payments that may be required under the coal
      contracts if no deliveries are
made.


(d)
            Represents
      forecasted capital expenditures, under which substantial commitments have
      been made. The Company only forecasts capital expenditures for the next
      five years. Budgeted construction expenditures of $2.0 million for PNM Gas
      prior to it being sold on January 30, 2009, are included in the 2009
      amount above.


(e)
            PPA
      amounts do not include amounts for Valencia that PNM is obligated to pay
      since Valencia is consolidated by PNM in accordance with FIN
      46R.  See Note 9.


(f)
            The
      Company only forecasts funding for its pension and retiree medical plan
      for the next five years.


(g)
            The
      operating lease amounts are net of amounts to be returned to PNM as
      payments on its investments in related lessor notes.  See
      Investments in Note 1 and Note 7.


(h)
            PNMR
      is unable to reasonably estimate the timing of FIN 48 liability and
      interest payments in individual years due to uncertainties in the timing
      of the effective settlement of tax positions.  Therefore, PNMR’s
      FIN 48 liability of $16.4 million and FIN 48 interest payable of $0.2
      million are not reflected in this
table.





Contingent
Provisions of Certain Obligations





PNMR, PNM
and TNMP have a number of debt obligations and other contractual commitments
that contain contingent provisions.  Some of these, if triggered,
could affect the liquidity of the Company.  PNMR, PNM or TNMP could be
required to provide security, immediately pay outstanding obligations or be
prevented from drawing on unused capacity under certain credit agreements if the
contingent requirements were to be triggered.  The most significant
consequences resulting from these contingent requirements are detailed in the
discussion below.





The PNMR
Facility, the PNM Facility, and the TNMP Facility contain “ratings triggers,”
for pricing purposes only.  If PNMR, PNM, or TNMP is downgraded or
upgraded by the ratings agencies, the result would be an increase or decrease in
interest cost, respectively.  In addition, these facilities contain
contingent requirements that require the maintenance of debt-to-capital ratios,
including for PNMR and PNM the present value of payments under the




A-54


PVNGS and
EIP leases as debt, of less than 65%.  If such ratio were to exceed
65%, the entity could be required to repay all borrowings under its facility, be
prevented from drawing on the unused capacity under the facility, and be
required to provide security for all outstanding letters of credit issued under
the facility.





If a
contingent requirement were to be triggered under the PNM Facility resulting in
an acceleration of the outstanding loans under the PNM Facility, a cross-default
provision in the PVNGS leases could occur if the accelerated amount is not
paid.  If a cross-default provision is triggered, the lessors have the
ability to accelerate their rights under the leases, including acceleration of
all future lease payments.





PNM's
standard purchase agreement for the procurement of gas for its fuel needs
contains a contingent requirement that could require PNM to provide security for
its gas purchase obligations if the seller were to reasonably believe that PNM
was unable to fulfill its payment obligations under the agreement.





The
master agreement for the sale of electricity in the WSPP contains a contingent
requirement that requires PNM to provide security if its debt falls below
investment grade rating.  Additionally, both PNM and FCP utilize
standard derivative contracts to financially hedge and trade energy. These
agreements contain contingent requirements that require PNM or PNMR to provide
security if its debt falls below investment grade rating. The Company has
provided the required security under these agreements.  The WSPP
agreement also contains a contingent requirement, commonly called a material
adverse change provision, which could require PNM to provide security if a
material adverse change in its financial condition or operations were to
occur.





No other
conditions have occurred that would result in any of the above contingent
provisions being implemented.





Capital
Structure





The
capitalization tables below include the current maturities of long-term debt,
but do not include short-term debt and do not include operating lease
obligations as debt.





December
      31,PNMR
            
            2008
            
            
            2007Common
      equity
            
            
            49.3
            %
            
            
            50.0
            %Convertible
      preferred stock
            
            
            3.0
            %
            
            
            -Preferred
      stock of subsidiary
            
            
            0.3
            %
            
            
            0.3
            %Long-term
      debt
            
            
            47.4
            %
            
            
            49.7
            %Total
      capitalization
            
            
            100.0
            %
            
            
            100.0
            %PNMCommon
      equity
            
            
            55.7
            %
            
            
            57.8
            %Preferred
      stock
            
            
            0.5
            %
            
            
            0.5
            %Long-term
      debt
            
            
            43.8
            %
            
            
            41.7
            %Total
      capitalization
            
            
            100.0
            %
            
            
            100.0
            %TNMPCommon
      equity
            
            
            71.6
            %
            
            
            57.8
            %Long-term
      debt
            
            
            28.4
            %
            
            
            42.2
            %Total
      capitalization
            
            
            100.0
            %
            
            
            100.0
            %





A-55


OTHER
ISSUES FACING THE COMPANY





Climate
Change Issues





In May
2007, the U.S. Supreme Court held that the EPA has the authority to regulate GHG
under the Clean Air Act.  This decision, coupled with an increased
focus in Congress on legislation to address climate change, has heightened the
importance of this issue for the energy industry.   Although there
continues to be debate over the details and best design for state and federal
programs, increased state and federal legislative and regulatory activities
calling for regulation of GHG indicate that climate change protection
legislation and regulation are likely in the future.





On July
30, 2008, EPA published the Greenhouse Gas Advanced Notice of Proposed
Rulemaking.  This notice represents EPA’s next step in responding to
the Supreme Court case.  The notice identified, but did not choose
among, options for GHG regulation and requested comments on the options
presented.   Absent Congressional action, in due course we would
expect the EPA to adopt regulations relating to GHG.





In
addition, several legislative initiatives are under consideration in Congress
that would regulate GHG. These initiatives range from general limitations on GHG
to the imposition of a so-called “cap and trade” system to the imposition of a
tariff on GHG.  It is unclear whether or when legislation will be
passed, although the new administration and several leading members of Congress
have expressed their intent to pass legislation as soon as
practicable.





Approximately
82.6% of PNM’s owned and leased generating capacity consists of coal or
gas-fired generation that produces GHG.  All of Optim Energy’s owned
generation produces GHG.  Based on our current plans, we do not expect
our output of GHG to increase significantly in the near-term.  Many
factors affect the amount of GHG, including plant performance.  For
example, if PVNGS experienced prolonged outages, it may require PNM to depend on
other power supply resources such as gas-fired generation, which could increase
GHG.Because of our
dependence on fossil-fueled generation, any legislation that imposes a limit or
cost on GHG will impact the cost at which we produce
electricity.    While we expect to be entitled to recover
that cost through our rates, the timing and outcome of proceedings for cost
recovery is uncertain.  In addition, to the extent that we recover any
additional costs through rates, our customers may reduce their demand, relocate
facilities to other areas with lower energy costs or take other actions that
ultimately will adversely impact us.





Given the
geographic location of our facilities and customers, we generally have not been
exposed to the extreme weather events, , and other physical impacts commonly
attributed to climate change, with the possible exception of drought conditions
periodically, and we generally do not expect physical changes to be of material
consequence to us in the near-term. Drought conditions in northwestern New
Mexico could impact the availability of water for cooling the coal
plants.  Water shortage sharing agreements have been in place since
2003 although no shortage has been declared due to sufficient snow pack in the
San Juan Basin.  PNM also has a supplemental water contract in place
with the Jicarilla Tribe to help address any water shortages from primary
sources.The contract
expires December 31, 2016.





In 2006,
the Company became a founding member of the United States Climate Action
Partnership (“USCAP”), a coalition currently consisting of 35 businesses and
national environmental organizations calling on the federal government to enact
national legislation to reduce GHG at the earliest practicable date.  
USCAP released A Call To
Action, a set of principles and recommendations outlining a policy
framework for federal climate protection legislation in January 2007, and
released its Blueprint for
Legislative Action to the U.S. Congress and the Obama Administration in
December 2008.   As a member of USCAP, it is the Company’s position
that a mandatory, economy-wide, market-driven approach that includes a cap and
trade program, combined with other complementary state and federal policies, is
the most cost effective and environmentally efficient means of addressing GHG
reductions.  The Company intends to continue working with USCAP,
government agencies, and Congress to advocate for federal action to address this
challenging environmental issue that is closely linked with the U.S. economy,
energy supply, and energy security.


A-56


In 2008,
PNMR’s interests in generating plants, through PNM and Optim
Energy, emitted approximately 7.9 million metric tons of carbon dioxide,
the vast majority of its GHG.  By comparison, the total GHG in the United
States in 2006, the latest year for which the EPA has compiled this data, were
approximately 7 billion metric tons, of which approximately 6 billion metric
tons were carbon dioxide.  Electricity generation accounted for
approximately 2.3 billion metric tons of the carbon dioxide
emissions.





PNM has
several programs underway to mitigate its GHG, and thereby to reduce its climate
change risk.  These include the release of two RFPs in mid-2008 for
additional renewable generation capacity and the launch of customer-owned solar
generation programs. PNM expects to produce approximately 35,000 GWh of
electricity from renewable resources over the next 19 years avoiding nearly 20
million metric tons of GHG. Also in 2008, PNM filed requests for approval to
implement additional electric energy efficiency and load management programs
with the NMPRC and expects approval this year. Over the next 19 years, PNM
projects the expanded energy efficiency and load management programs will
provide the equivalent of approximately 15,000 GWh of electricity, which will
avoid about 8.5 million metric tons of GHG. These estimates are subject to
change given that it is difficult to compute estimated avoidance accurately
because of the many variables that impact it, including changes in demand for
electricity.





The Board
is updated by management and regularly considers the issues around climate
change, our GHG and potential financial consequences that might result from
climate change and the possible regulation of GHG.  In particular, our
management periodically reports to the Board on all of the matters discussed in
this section.  On December 9, 2008, the Board established a new
stand-alone committee, the Public Policy and Sustainability Committee, and
approved a charter of its delegated responsibilities. This committee will review
Company practices and procedures to assess the sustainability impacts of our
operations and products on the environment.  This committee will also
have responsibility to review the Company’s environmental management systems,
monitor the implementation of the Company’s corporate environmental policy,
monitor the promotion of energy efficiency, and our use of renewable energy
resources.  The committee will advise the Board on a regular basis
regarding the Company’s activities and initiatives in these areas.





Pursuant
to New Mexico law, each utility must submit an integrated resource plan to the
NMPRC every three years to evaluate renewable energy, energy efficiency, load
management, distributed generation and conventional supply-side resources on a
consistent and comparable basis.  The integrated resource plan is
required to take into consideration risk and uncertainty of fuel supply, price
volatility and costs of anticipated environmental regulations when evaluating
resources options to meet supply needs of PNM’s customers.  The NMPRC
issued an order in June 2007, requiring that New Mexico utilities factor a
standardized cost of carbon emissions into their integrated resource plans using
prices ranging between $8 and $40 per metric ton of CO2 emitted
and escalating these costs by 2.5% per year.  Under the NMPRC order,
each utility must analyze these standardized prices as projected operating costs
in 2010 and thereafter.  Reflecting the developing nature of this
issue, the NMPRC order states that these prices may be changed in the future to
account for additional information or changed
circumstances.   PNM is required, however, to use these prices
for purposes of its integrated resource plan, and the prices may not reflect the
costs that it ultimately will incur.  PNM’s integrated resource plan
was filed with the NMPRC on September 16, 2008. The analysis showed that
incorporation of the NMPRC required carbon emissions costs did not significantly
change the dispatch of existing facilities nor the resource decisions regarding
future facilities over the next 20 years.  Much higher GHG costs than
assumed in the NMPRC analysis are necessary to impact the dispatch of existing
resources or future resource decisions. The primary consequence of GHG costs was
an increase to generation portfolio costs.




In 2007,
five western states (Arizona, California, New Mexico, Oregon and Washington)
entered into an accord, called the Western Regional Climate Action Initiative
(the “WCI”), to reduce GHG from automobiles and certain industries, including
utilities.  Since then, Montana, Utah, British Columbia, Manitoba,
Ontario, and Quebec have joined as partners in the
WCI.    The WCI released design recommendations for elements
of a regional cap and trade program on September 23, 2008, and has created
several subcommittees to develop detailed implementation
recommendations.  The subcommittees are slated to complete their work
in 2010.  Under the WCI recommendations, GHG from the electricity
sector and fossil fuel consumption of the industrial and commercial sectors will
be capped at then current levels and subject to regulation starting in
2012.  Over time, producers will be required to reduce their
GHG.   Implementation of the design elements for GHG reductions
will fall to each state and province.  In New Mexico, PNM believes
this will require new legislation and rulemaking.  The Company




A-57


expects
to participate in the legislative and rulemaking processes in New Mexico and
will not be able to fully assess the implications of New Mexico regulation of
GHG until the legislative and rulemaking processes have progressed
significantly.





In
December 2008, New Energy Economy (“NEE”), a non-profit environmental advocacy
organization, petitioned the New Mexico Environmental Improvement Board (“EIB”)
to amend existing regulations and adopt new regulations requiring a cap on GHG,
including a statewide GHG limit of 25% below 1990 levels by 2020.  The
program provides for an absolute cap without the ability to trade capacity with
others.  The EIB ordered legal briefs to be filed on the issue of the
EIB’s authority to regulate GHG.  The EIB has agreed to conduct a
hearing in August 2009 on the NEE petition.  We do not know whether,
when or how the EIB will respond to the NEE petitions and have not determined
what the impact would be on us.





Also in February 2009, legislation was introduced in the New Mexico
legislature proposing to require the implementation by EIB of a cap and trade
system designed to reduce GHG.  We do not know whether, when or how the
legislature will act upon the proposed legislation and have not determined what
its impact would be on us.





The
regulation of GHG is expected to have a material impact on the utility industry
both in terms of increased costs associated with fossil fuels and increased
opportunities associated with fuels other than fossil fuels, but it is premature
to attempt to quantify the possible costs and other implications of these
impacts on the Company.





Other
Matters





See Notes
16, 17 and 18 for a discussion of commitments and contingencies, rate and
regulatory matters and environmental issues facing the Company.





CRITICAL
ACCOUNTING POLICIES AND ESTIMATES





The
preparation of financial statements in accordance with GAAP requires management
to apply accounting policies and to make estimates and judgments that best
provide the framework to report the results of operations and financial position
for PNMR, PNM and TNMP.   As a result, there exists the
likelihood that materially different amounts would be reported under different
conditions or using different assumptions. Management has identified the
following accounting policies that it deems critical to the portrayal of the
financial condition and results of operations and that involve significant
subjectivity.  The following discussion provides information on the
processes utilized by Management in making judgments and assumptions as they
apply to its critical accounting policies.





Unbilled
Revenues





As
discussed in Note 1, the Company records unbilled revenues representing
management's assessment of the estimated amount customers will be billed for
services rendered between the meter-reading dates in a particular month and the
end of that month. Management estimates unbilled revenues based on sales
recorded in the billing system, taking into account weather impacts. The method
is consistent with the approach to normalization employed for rate case billing
determinants and the load forecast. To the extent the estimated amount differs
from the amount subsequently billed, revenues will be affected. Unbilled
revenues are separately reported on the Consolidated Balance Sheets of PNMR, PNM
and TNMP.





Regulatory
Accounting





The
Company is subject to the provisions of SFAS 71, as discussed in Note 1.
Accordingly, the Company has recorded assets and liabilities resulting from the
effects of the ratemaking process, which would not be recorded under GAAP for
non-regulated entities.  The Company's continued ability to meet the
criteria for application of SFAS 71 may be affected in the future by competitive
forces and restructuring in the electric industry. In the event that SFAS 71 no
longer applies to all or a separable portion of the Company's operations, the
related regulatory assets and liabilities would be written off unless an
appropriate regulatory recovery mechanism is provided.


A-58


The
Company evaluates whether or not recovery of regulatory assets through future
rates is probable and make various assumptions in those analyses. The
expectations of future recovery are generally based on orders issued by
regulatory commissions or historical experience, as well as discussions with
applicable regulatory authorities.  If future recovery of
these costs ceases to be probable, the utility would be required to record a
charge in current period earnings for the portion of the costs that were not
recoverable.





Impairments





Tangible
long-lived assets and amortized intangible assets are evaluated for impairment
when events and circumstances indicate that the assets might be impaired in
accordance with SFAS 144.  These potential impairment indicators
include management's assessment of fluctuating market conditions as a result of
industry deregulation; planned and scheduled customer purchase commitments;
future market penetration; fluctuating market prices resulting from factors
including changing fuel costs and other economic conditions; weather patterns;
and other market trends. The amount of impairment recognized is the difference
between the fair value of the asset and the carrying value of the asset and
would reduce both the asset and current period earnings.





Goodwill
and non-amortizable other intangible assets are evaluated for impairment in
accordance with SFAS 142 at least annually, or more frequently if events and
circumstances indicate that the goodwill and intangible assets might be
impaired. Amortizable other intangible assets are evaluated for impairment in
accordance with SFAS 144 when events and circumstances indicate that the assets
might be impaired.





Variations
in the assessment of potential impairment or in the assumptions used to
calculate an impairment could result in different outcomes which could
invariably, lead to significant effects on the consolidated financial
statements.





Decommissioning
Costs





Accounting
for decommissioning costs for nuclear and fossil-fuel generation involves
significant estimates related to costs to be incurred many years in the future
after plant closure. Changes in these estimates could significantly impact
PNMR's and PNM's financial position, results of operations and cash flows. PNM
owns and leases nuclear and fossil-fuel generation facilities that are within
and outside of its retail service areas. In accordance with SFAS 143, PNM is
only required to recognize and measure decommissioning liabilities for tangible
long-lived assets for which a legal obligation exists. Adoption of SFAS 143
changed the method of accounting for both nuclear generation decommissioning and
fossil-fuel generation decommissioning. Nuclear decommissioning costs are based
on site-specific estimates of the costs for removing all radioactive and other
structures at the site. PVNGS Unit 3 is excluded from PNM's retail rates while
PVNGS Units 1 and 2 are included. PNM collects a provision for ultimate
decommissioning of PVNGS Units 1 and 2 in its rates and recognizes a
corresponding expense and liability for these amounts. PNM believes that it will
continue to be able to collect in rates for its legal asset retirement
obligations for nuclear generation activities included in the ratemaking
process.  Asset retirement obligations and nuclear decommissioning
costs are discussed in Note 15.





Derivatives





The
Company follows the provisions set forth under SFAS 133. SFAS 133 establishes
accounting and reporting standards requiring derivative instruments to be
recorded in the balance sheet as either an asset or liability measured at their
fair value. SFAS 133 also requires that changes in the derivatives' fair value
be recognized currently in earnings unless specific hedge accounting or normal
purchase and sale criteria are met. Special accounting for qualifying hedges
requires that a company must formally document, designate, and assess the
effectiveness of transactions that receive hedge accounting. These rules allow
derivative gains and losses for fair-value hedges to offset related results on
the hedged item in the statement of earnings.  SFAS 133 provides that
the effective portion of the gain or loss on a derivative instrument designated
and qualifying as a cash flow hedging instrument be reported as a component of
accumulated other comprehensive income and be reclassified into earnings in the
period during which the hedged forecasted transaction affects earnings. The
results of hedge ineffectiveness and the portion of the change in fair value of
a derivative that an entity has chosen to exclude from hedge effectiveness are
required to be presented in current earnings.


A-59


Pension
and Other Postretirement Benefits





The Company maintains qualified
defined benefit pension plans, postretirement benefit plans providing medical
and dental benefits, and executive retirement programs.The net periodic
benefit income (cost) and the calculation of the projected benefit obligations
are both recognized in the Company’s financials statements and depend on
investment performance, the level of contributions made to the plans, and
employee demographics. They both require the use of a number of actuarial
assumptions and estimates.  The most critical of the actuarial
assumption are the expected long-term rate of return, the discount rate, and
projected health care cost trend rates.  The Company reviews and
evaluates its actuarial assumptions annually and adjusts them as
necessary.  See Note 12





Accounting
for Contingencies





The
financial results of the Company may be affected by judgments and estimates
related to loss contingencies.  A significant contingency the Company
accounts for is the loss associated with uncollectible trade accounts
receivable.  The determination of bad debt expense is based on factors
such as historical write-off experience, aging of accounts receivable balances,
regulatory rulings and general economic conditions and customer
behavior.





Contingencies
related to litigation and claims, as well as environmental and regulatory
matters, also require the use of significant judgment and
estimation.  The Company attempts to take into account all know
factors when determining the proper accrual, however the actual outcomes can
vary from the amount accrued.





Income
Taxes





The
Company’s income tax expense and related balance sheet amounts involve
significant judgment and use of estimates.  Amount of deferred income
tax assets and liabilities, as well as current and noncurrent accruals, involve
judgment and estimates related to timing and probability of the recognition of
income and deductions by taxing authorities.  In addition, some
temporary differences are accorded flow-through treatment by the Company’s
regulators and impact the Company’s effective tax rate.  In assessing
the likelihood of the realization of deferred tax assets, management considers
the estimated amount and character of future taxable income.  Actual
income taxes could vary from estimated amounts due to the future impacts of
various items, including changes in income tax laws, the Company’s forecasted
financial condition and results of operations in future periods, as well as the
final review from taxing authorities.





Market
Risk





See Item
7A. Quantitative and Qualitative Disclosure About Market Risk for discussion
regarding the Company's accounting policies and sensitivity analysis for the
Company's financial instruments and derivative energy and other derivative
contracts.





MD&A FOR PNM





RESULTS
OF OPERATIONS





YEARS
ENDED DECEMBER 31, 2008, 2007 AND 2006





PNM’s
continuing operations are presented in the PNM Electric segment, which is
identical to the segment presented above in Results of Operations for
PNMR.  PNM’s discontinued operations are presented in the PNM Gas
segment, which is identical to the total earnings from discontinued operations,
net of income taxes, shown on the Consolidated Statements of Earnings for both
PNM and PNMR.  See Note 23.


A-60


MD&A
FOR TNMP





RESULTS
OF OPERATIONS





TNMP
operates in one reportable segment, TNMP Electric, as presented above in Results
of Operations for PNMR.  However, effective January 1, 2007, TNMP’s
New Mexico operations were transferred to PNM Electric and are reported as
discontinued operations in TNMP’s Consolidated Statement of Earnings for
2006.  These operations are not presented as discontinued in PNMR
segment presentation.  Accordingly, information concerning TNMP’s
results of operations for 2007 compared to 2006 is presented below, whereas
information comparing 2008 to 2007 is the same as the TNMP Electric segment in
Results of Operations for PNMR above.





YEAR
ENDED DECEMBER 31, 2007 COMPARED TO YEAR ENDED DECEMBER 31, 2006





The table
below summarizes the significant changes to operating revenues, gross margin,
earnings before income taxes, and net earnings:





2007/2006
      ChangeEarningsBeforeTotal
            
            
            Gross
            
            
            Income
            
            
            NetRevenues
            
            
            Margin
            
            
            Taxes
            
            
            Earnings(In
      millions)Retail
      growth
            
            $
            4.1
            
            
            $
            4.1
            
            
            $
            4.1
            
            
            $
            2.7Rate
      decrease/synergy savings
            
            
            -
            
            
            
            -
            
            
            
            1.5
            
            
            
            1.0PUCT
      order
            
            
            16.4
            
            
            
            16.4
            
            
            
            3.9
            
            
            
            2.5Rate
      case expenses
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Operational
      costs
            
            
            -
            
            
            
            -
            
            
            
            (1.7
            )
            
            
            (1.1
            )Debt
      reduction
            
            
            -
            
            
            
            -
            
            
            
            3.0
            
            
            
            2.0Discontinued
      operations
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (3.6
            )Other
            
            
            2.0
            
            
            
            0.1
            
            
            
            0.4
            
            
            
            (0.8
            )Total increase (decrease)
            
            $
            22.5
            
            
            $
            20.6
            
            
            $
            11.2
            
            
            $
            2.7





In 2007,
a 1.4% increase in the average customer count, higher per-customer usage and
colder temperatures early in the year were partially offset by milder
temperatures during the cooling season.   In 2006, a 2.0%
increase in the average customer count was mostly offset by reduced usage from
milder temperatures.





2006
earnings were reduced by a full year of decreased rates in conjunction with the
acquisition beginning in May 2005, in addition to synergy savings credits to
customers beginning in July 2005.  The return of synergy savings
credits to customers ended in June 2007, resulting in an increase to net
earnings in 2007 when compared to 2006.





The PUCT
issued a signed order on November 2, 2006 related to the stranded costs incurred
by TNMP as part of the deregulation of the Texas energy market and the
associated carrying charges. This PUCT order resulted in a net increase to
revenues, partially offset by increased amortization expenses.  In
2006, carrying charges associated with the stranded costs increased $4.1 million
to a total of $7.0 million of income in 2006 that did not recur in 2007, as
charges began to be collected in December 2006.  Also in 2006, costs
were decreased by the deferral of $5.0 million of rate case expenses that are
also being collected through the PUCT order.





Operational
costs include expenses for materials and supplies, self-insurance and
depreciation as well as shared services, employee labor, and pension and benefit
costs.  In 2007, increases in these costs were partially offset by
reductions in incentive-based and stock-based compensation costs and a decrease
in property taxes.  In 2006, these costs increased primarily due to a
full year of shared services costs after the acquisition by PNMR on June 6,
2005.





A
reduction of long-term debt in 2007 resulted in decreased interest
expenses.


A-61


Earnings
from discontinued operations decreased from 2007 to 2006 due to the transfer of
these operations to PNM effective January 1, 2007.  Earnings from
discontinued operations decreased during 2006 primarily due to the reduction in
rates effective January 2006 related to the acquisition and a full year of
shared services costs.





Other
changes in 2007 include an increase in transmission sales prices regulated by
the PUCT, which was more than offset by an increase in purchase prices to other
transmission providers.  In 2006, the increase in transmission
purchase prices more than offset the increase in sales prices, resulting in a
net decrease to margin.  Additionally in 2006, interest expenses
increased related to a customer clawback.  In 2007, TNMP incurred
severance and consulting costs related to PNMR’s business improvement
plan.





The
effective tax rate for TNMP continuing operations was 36.64% in 2007, 32.32% in
2006 and 35.46% in 2005.  The increased rate in 2007 reflects the
addition of the Texas margin tax to income tax rates in 2007.  Prior
to 2007, Texas had a franchise tax that was included in operating
expenses.  The effective tax rate for TNMP discontinued operations was
30.18% in 2006 and 35.67% in 2005.




ITEM
7A.               QUANTITATIVE
AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK





PNMR
controls the scope of its various forms of risk through a comprehensive set of
policies and procedures and oversight by senior level management and the
Board.  The Board’s Finance Committee sets the risk limit
parameters.  The RMC, comprised of corporate and business segment
officers and other managers, oversees all of the risk management activities,
which include commodity price, credit, equity, interest rate and business
risks.  The RMC has oversight for the ongoing evaluation of the
adequacy of the risk control organization and policies.  PNMR has a
risk control organization, headed by the Vice President and Treasurer, which is
assigned responsibility for establishing and enforcing the policies, procedures
and limits and evaluating the risks inherent in proposed transactions, on an
enterprise-wide basis.





The RMC’s
responsibilities specifically include: establishment of a general policy
regarding risk exposure levels and activities in each of the business segments;
authority to approve the types of instruments traded; authority to establish a
general policy regarding counterparty exposure and limits; authorization and
delegation of transaction limits; review and approval of controls and
procedures; review and approval of models and assumptions used to calculate
mark-to-market and risk exposure; authority to approve and open brokerage and
counterparty accounts; review of hedging and risk activities; and quarterly
reporting to the Board and its Finance Committee on these
activities.





The RMC
also proposes risk limits, such as VaR and GEaR, to the Finance
Committee.  The Finance Committee ultimately sets the risk
limits.





It is the
responsibility of each business segment to create its own control procedures and
policies within the parameters established by the Corporate Financial Risk
Management Policy, approved by the Finance Committee.  The RMC reviews
and approves these policies, which are created with the assistance of the
Corporate Controller, Director of Internal Audit, and the Vice President and
Treasurer.  Each business segment’s policies address the following
controls:  authorized risk exposure limits; authorized instruments and
markets; authorized personnel; policies on segregation of duties; policies on
mark-to-market accounting; responsibilities for deal capture; confirmation
procedures; responsibilities for reporting results; statement on the role of
derivative transactions; and limits on individual transaction size (nominal
value).





To the
extent an open position exists, fluctuating commodity prices can impact
financial results and financial position, either favorably or
unfavorably.  As a result, the Company cannot predict with certainty
the impact that its risk management decisions may have on its businesses,
operating results or financial position.





Accounting
for Derivatives





Under
derivative accounting and related rules for energy contracts, the Company
accounts for its various derivative instruments for the purchase and sale of
energy based on the Company’s intent.  Energy contracts that meet the
definition of a derivative under SFAS 133 and do not qualify for the normal
sales and purchases exception are recorded on the balance sheet at fair value at
each period end.  The changes in fair value are recognized in




A-62


earnings
unless specific hedge accounting criteria are met.  Should an energy
transaction qualify as a cash flow hedge under SFAS 133, fair value changes are
recognized on the balance sheet with a corresponding entry in other
comprehensive income to the extent the transaction is an effective
hedge.  The amounts in accumulated other comprehensive income are
recognized in results of operations when the hedged transaction settles and
impacts earnings.  Derivatives that meet the normal sales and
purchases exception within SFAS 133 are not marked to market but rather recorded
in results of operations when the underlying transaction settles.  The
contracts recorded at fair value that do not qualify for hedge accounting are
classified as trading transactions or economic hedges.  Trading
transactions are defined as derivative instruments that are either speculative
and expose the Company to market risk or transactions that lock in margin with
no forward market risk and are not economic hedges.  Economic hedges
are defined as derivative instruments, including long-term power agreements,
used to hedge generation assets, purchase power costs, and customer load
requirements.





Commodity
Risk





Marketing
and procurement of energy often involve market risks associated with managing
energy commodities and establishing open positions in the energy markets,
primarily on a short-term basis.  These risks fall into three
different categories:  price and volume volatility, credit risk of
counterparties, and adequacy of the control environment.  The
Company’s operations subject to market risk routinely enter into various
derivative instruments such as forward contracts, option agreements and price
basis swap agreements to hedge price and volume risk on power commitments and
fuel requirements and to minimize the risk of market fluctuations in wholesale
portfolios.





PNM’s
unregulated operations, including long-term contracts and short-term sales, are
managed primarily through a net asset-backed marketing strategy, whereby PNM’s
aggregate net open forward contract position is covered by its forecasted excess
generation capabilities or market purchases.  PNM would be exposed to
market risk if its generation capabilities were to be disrupted or if its retail
load requirements were to be greater than anticipated.  If all or a
portion of the net open contract position were required to be covered as a
result of the aforementioned unexpected situations, commitments would have to be
met through market purchases.  Additionally, PNM’s regulated
generation capacity is inadequate to meet retail load requirements during
certain peak times and PNM must rely on market purchases to meet these
requirements.  As such, except to the extent costs are recoverable
through the Emergency FPPAC, PNM is exposed to risks related to fluctuations in
the market price of energy that could impact the sales price or purchase price
of energy.  In 2008, PNM ended speculative trading.





First
Choice is responsible for energy supply related to the sale of electricity to
retail customers in Texas.  TECA contains no provisions for the
specific recovery of fuel and purchased power costs.  The rates
charged to First Choice customers are negotiated with each
customer.  As a result, changes in purchased power costs will affect
First Choice’s operating results.  First Choice is exposed to market
risk to the extent that its retail rates or cost of supply fluctuates with
market prices.  Additionally, fluctuations in First Choice retail load
requirements greater than anticipated may subject First Choice to market
risk.  First Choice’s basic strategy is to minimize its exposure to
fluctuations in market energy prices by matching fixed price sales contracts
with supply instruments designed to preserve targeted margins.  In
2008, First Choice ended speculative trading.





GAAP
defines fair value as the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market participants at
the measurement date.  Fair value is based on current market quotes as
available and are supplemented by modeling techniques and assumptions made by
the Company to the extent quoted market prices or volatilities are not
available.  External pricing input availability varies based on
commodity location, market liquidity, and term of the agreement.  The
Company regularly assesses the validity and availability of pricing data of its
derivative transactions.  Although management uses its best judgment
in estimating the fair value of these financial instruments, there are inherent
limitations in any estimation technique.





Effective
January 1, 2008, the Company determines the fair market values of its
instruments based on the fair value hierarchy established in SFAS 157, which
requires an entity to maximize the use of observable inputs and minimize the use
of unobservable inputs when measuring fair value. The standard describes three
levels of inputs that may be used to measure fair value.  Level 1
inputs are quoted prices (unadjusted) in active markets for identical assets or
liabilities that the reporting entity has the ability to access at the
measurement date.  Level 2 inputs are inputs other than quoted prices
included within Level 1 that are observable for the asset or liability, either
directly or indirectly.  Level 3 inputs are unobservable inputs for
the asset or liability.  Multiple sources of broker data are




A-63


referenced
to triangulate reasonable ranges of values and to facilitate validation of Level
2 and Level 3 commodity transactions.





The
following table shows the net fair value of mark-to-market energy contracts
included in the Consolidated Balance Sheets.  See Note 8 for
additional information.





December
      31, 2008Trading
            
            
            Economic
              Hedges
            
            
            TotalPNMR
            
            (In
      thousands)Mark-to-market
      energy contracts:Current asset
            
            $
            19,469
            
            
            $
            5,699
            
            
            $
            25,168Long-term asset
            
            
            7,594
            
            
            
            2,060
            
            
            
            9,654Total mark-to-market assets
            
            
            27,063
            
            
            
            7,759
            
            
            
            34,822Current liability
            
            
            (18,142
            )
            
            
            (12,630
            )
            
            
            (30,772
            )Long-term liability
            
            
            (6,365
            )
            
            
            (551
            )
            
            
            (6,916
            )Total mark-to-market liabilities
            
            
            (24,507
            )
            
            
            (13,181
            )
            
            
            (37,688
            )Net
      fair value of mark-to-market energy contracts
            
            $
            2,556
            
            
            $
            (5,422
            )
            
            $
            (2,866
            )PNMMark-to-market
      energy contracts:Current asset
            
            $
            347
            
            
            $
            2,976
            
            
            $
            3,323Long-term asset
            
            
            -
            
            
            
            2,060
            
            
            
            2,060Total mark-to-market assets
            
            
            347
            
            
            
            5,036
            
            
            
            5,383Current liability
            
            
            (86
            )
            
            
            (7,785
            )
            
            
            (7,871
            )Long-term liability
            
            
            -
            
            
            
            (551
            )
            
            
            (551
            )Total mark-to-market liabilities
            
            
            (86
            )
            
            
            (8,336
            )
            
            
            (8,422
            )Net
      fair value of mark-to-market energy contracts
            
            $
            261
            
            
            $
            (3,300
            )
            
            $
            (3,039
            )








December
      31, 2007Trading
            
            
            Economic
              Hedges
            
            
            TotalPNMR
            
            (In
      thousands)Mark-to-market
      energy contracts:Current asset
            
            $
            32,451
            
            
            $
            15,060
            
            
            $
            47,511Long-term asset
            
            
            8,335
            
            
            
            37,359
            
            
            
            45,694Total mark-to-market assets
            
            
            40,786
            
            
            
            52,419
            
            
            
            93,205Current liability
            
            
            (34,753
            )
            
            
            (17,991
            )
            
            
            (52,744
            )Long-term liability
            
            
            (7,610
            )
            
            
            (47,564
            )
            
            
            (55,174
            )Total mark-to-market liabilities
            
            
            (42,363
            )
            
            
            (65,555
            )
            
            
            (107,918
            )Net
      fair value of mark-to-market energy contracts
            
            $
            (1,577
            )
            
            $
            (13,136
            )
            
            $
            (14,713
            )PNMMark-to-market
      energy contracts:Current asset
            
            $
            11
            
            
            $
            13,562
            
            
            $
            13,573Long-term asset
            
            
            -
            
            
            
            37,359
            
            
            
            37,359Total mark-to-market assets
            
            
            11
            
            
            
            50,921
            
            
            
            50,932Current liability
            
            
            (9
            )
            
            
            (17,019
            )
            
            
            (17,028
            )Long-term liability
            
            
            -
            
            
            
            (47,565
            )
            
            
            (47,565
            )Total mark-to-market liabilities
            
            
            (9
            )
            
            
            (64,584
            )
            
            
            (64,593
            )Net
      fair value of mark-to-market energy contracts
            
            $
            2
            
            
            $
            (13,663
            )
            
            $
            (13,661
            )




A-64


Under FSP
FIN 39-1, the Company has elected not to offset the fair value amounts of
derivative instruments under master netting arrangements or with the cash
collateral associated with its derivative positions.





The
following table details the changes in the net asset or liability balance sheet
position from one period to the next for mark to market energy
transactions:





December
      31, 2008Trading
            
            
            Economic
              Hedges
            
            
            TotalPNMR
            
            (In
      thousands)Sources
      of fair value gain (loss):Net
      fair value at beginning of year
            
            $
            (1,577
            )
            
            $
            (13,136
            )
            
            $
            (14,713
            )Adoption
      of SFAS 157
            
            
            -
            
            
            
            17,253
            
            
            
            17,253Adjusted
      beginning fair value
            
            
            (1,577
            )
            
            
            4,117
            
            
            
            2,540Amount
      realized on contracts delivered during period
            
            
            44,540
            
            
            
            976
            
            
            
            45,516Changes
      in fair value
            
            
            (41,701
            )
            
            
            (10,895
            )
            
            
            (52,596
            )Net
      change recorded as mark-to-market
            
            
            2,839
            
            
            
            (9,919
            )
            
            
            (7,080
            )Unearned/prepaid
      option premiums
            
            
            1,294
            
            
            
            380
            
            
            
            1,674Net
      fair value at end of year
            
            $
            2,556
            
            
            $
            (5,422
            )
            
            $
            (2,866
            )PNMSources
      of fair value gain (loss):Net
      fair value at beginning of year
            
            $
            2
            
            
            $
            (13,663
            )
            
            $
            (13,661
            )Adoption
      of SFAS 157
            
            
            -
            
            
            
            17,253
            
            
            
            17,253Adjusted
      beginning fair value
            
            
            2
            
            
            
            3,590
            
            
            
            3,592Amount
      realized on contracts delivered during period
            
            
            (4,281
            )
            
            
            (1,044
            )
            
            
            (5,325
            )Changes
      in fair value
            
            
            4,540
            
            
            
            (5,552
            )
            
            
            (1,012
            )Net
      change recorded as mark-to-market
            
            
            259
            
            
            
            (6,596
            )
            
            
            (6,337
            )Unearned/prepaid
      option premiums
            
            
            -
            
            
            
            (294
            )
            
            
            (294
            )Net
      fair value at end of year
            
            $
            261
            
            
            $
            (3,300
            )
            
            $
            (3,039
            )





December
      31, 2007Trading
            
            
            Economic
              Hedges
            
            
            TotalPNMR
            
            (In
      thousands)Sources
      of fair value gain (loss):Net
      fair value at beginning of year
            
            $
            926
            
            
            $
            2,540
            
            
            $
            3,466Amount
      realized on contracts delivered during period
            
            
            6,306
            
            
            
            12,445
            
            
            
            18,751Changes
      in valuation techniques
            
            
            301
            
            
            
            (4,403
            )
            
            
            (4,102
            )Changes
      in fair value
            
            
            (7,817
            )
            
            
            (15,970
            )
            
            
            (23,787
            )Net
      change recorded as mark-to-market
            
            
            (1,210
            )
            
            
            (7,928
            )
            
            
            (9,138
            )Unearned/prepaid
      option premiums
            
            
            (1,293
            )
            
            
            1,678
            
            
            
            385Reclass
      from deferred credits
            
            
            -
            
            
            
            (9,426
            )
            
            
            (9,426
            )Net
      fair value at end of year
            
            $
            (1,577
            )
            
            $
            (13,136
            )
            
            $
            (14,713
            )PNMSources
      of fair value gain (loss):Net
      fair value at beginning of year
            
            $
            43
            
            
            $
            2,542
            
            
            $
            2,585Amount
      realized on contracts delivered during period
            
            
            3,358
            
            
            
            13,899
            
            
            
            17,257Changes
      in valuation techniques
            
            
            332
            
            
            
            (4,386
            )
            
            
            (4,054
            )Changes
      in fair value
            
            
            (3,731
            )
            
            
            (17,968
            )
            
            
            (21,699
            )Net
      change recorded as mark-to-market
            
            
            (41
            )
            
            
            (8,455
            )
            
            
            (8,496
            )Unearned/prepaid
      option premiums
            
            
            -
            
            
            
            1,676
            
            
            
            1,676Reclass
      from deferred credits
            
            
            -
            
            
            
            (9,426
            )
            
            
            (9,426
            )Net
      fair value at end of year
            
            $
            2
            
            
            $
            (13,663
            )
            
            $
            (13,661
            )


The
following table provides the maturity of the net assets (liabilities), giving an
indication of when these




A-65


mark-to-market
amounts will settle and generate (use) cash.  The following values
were determined using broker quotes and option models:





Fair
Value of mark-to-market instruments at December 31, 2008





Less
      than1
      year
            
            
            1-3
      Years
            
            
            4+
      Years
            
            
            TotalPNMR
            
            
            
            
            (In
      thousands)Trading
            
            $
            1,327
            
            
            $
            1,229
            
            
            $
            -
            
            
            $
            2,556Economic
      hedges
            
            
            (6,931
            )
            
            
            1,467
            
            
            
            42
            
            
            
            (5,422
            )Total
            
            $
            (5,604
            )
            
            $
            2,696
            
            
            $
            42
            
            
            $
            (2,866
            )PNMTrading
            
            $
            261
            
            
            $
            -
            
            
            $
            -
            
            
            $
            261Economic
      hedges
            
            
            (4,809
            )
            
            
            1,467
            
            
            
            42
            
            
            
            (3,300
            )Total
            
            $
            (4,548
            )
            
            $
            1,467
            
            
            $
            42
            
            
            $
            (3,039
            )





The net
change in fair value of commodity derivative instruments designated as hedging
instruments is summarized as follows:





Year
      Ended December 31, 20082008
            
            
            2007Hedge
      InstrumentsPNMR
            
            (In
      thousands)Change
      in fair value of energy contracts
            
            $
            40,347
            
            
            $
            (33,181
            )Change
      in fair value of swaps and futures
            
            
            (936
            )
            
            
            1,667Change
      in the fair value of options
            
            
            (1,186
            )
            
            
            437Net
      change in fair value
            
            $
            38,225
            
            
            $
            (31,077
            )PNMChange
      in fair value of energy contracts
            
            $
            40,349
            
            
            $
            (39
            )Change
      in fair value of swaps and futures
            
            
            447
            
            
            
            822Net
      change in fair value
            
            $
            40,796
            
            
            $
            783





Risk
Management Activities





PNM
measures the market risk of its long-term contracts and wholesale activities
using a VaR calculation to maintain total exposure within management-prescribed
limits.  The VaR calculation reports the possible market loss for the
respective transactions.  This calculation is based on the
transaction’s fair market value on the reporting date.  Accordingly,
the VaR calculation is not a measure of the potential accounting mark-to-market
loss.  PNM utilizes the Monte Carlo simulation model of
VaR.  The Monte Carlo model utilizes a random generated simulation
based on historical volatility to generate portfolio values.  The
quantitative risk information, however, is limited by the parameters established
in creating the model.  The instruments being evaluated may trigger a
potential loss in excess of calculated amounts if changes in commodity prices
exceed the confidence level of the model used.  The VaR methodology
employs the following critical parameters:  volatility estimates,
market values of all contractual commitments, appropriate market-oriented
holding periods, and seasonally adjusted correlation estimates.  The
VaR calculation considers PNM’s forward position for calendar years 2009 and
2010.  PNM uses a holding period of three days as the estimate of the
length of time that will be needed to liquidate the positions.  The
volatility and the correlation estimates measure the impact of adverse price
movements both at an individual position level as well as at the total portfolio
level.  The two-tailed confidence level established is
95%.  For example, if VaR is calculated at $10.0 million, it is
estimated that in 950 out of 1,000 market simulations the pre-tax gain or loss
in liquidating the portfolio would not exceed $10.0 million in the three days
that it would take to liquidate the portfolio.





PNM
measures VaR for all transactions that are not directly asset-related and have
economic risk.  For the




A-66


year
ended December 31, 2008, the average VaR amount for these transactions was $0.3
million with high and low VaR amounts for the period of $1.4 million and
zero.  The VaR amount for these transactions at December 31, 2008 was
less than $0.1 million.  For the year ended December 31, 2007, the
average VaR amount for these transactions was $2.0 million with high and low VaR
amounts for the period of $6.4 million and zero.  The total VaR amount
for these transactions at December 31, 2007 was zero.





First
Choice measures the market risk of its retail sales commitments and supply
sourcing activities using a GEaR calculation to monitor potential risk exposures
related to taking contracts to settlement and a VaR calculation to measure
short-term market price impacts.





Because
of its obligation to serve customers, First Choice must take certain contracts
to settlement.  Accordingly, a measure that evaluates the settlement
of First Choice’s positions against earnings provides management with a useful
tool to manage its portfolio.  First Choice uses a hold-to-maturity at
risk for 12 months calculation for its GEaR measurement.  The
calculation utilizes the same Monte Carlo simulation approach described above at
a 95% confidence level and includes the retail load and supply portfolios.
Management believes the VaR results are a reasonable approximation of the
potential variability of earnings against forecasted earnings.  The
quantitative risk information, however, is limited by the parameters established
in creating the model.  The instruments being evaluated may trigger a
potential loss in excess of calculated amounts if changes in commodity prices
exceed the confidence level of the model used.  The GEaR calculation
considers First Choice’s forward position for the next twelve months and holds
each position to settlement.  The volatility and the correlation
estimates measure the impact of adverse price movements both at an individual
position level as well as at the total portfolio level.  For example,
if GEaR is calculated at $10.0 million, it is estimated that in 950 out of 1,000
market scenarios calculated by the model the losses against the Company’s
forecasted earnings over the next twelve months would not exceed $10.0
million.





For the
year ended December 31, 2008, the average GEaR amount was $16.1 million, with
high and low GEaR amounts for the period of $44.3 million and $6.0
million.  The total GEaR amount at December 31, 2008 was $10.2
million.  For the year ended December 31, 2007, the average GEaR
amount for these transactions was $16.2 million, with high and low GEaR amounts
for the period of $27.1 million and $5.7 million.  The total GEaR
amount for these transactions at December 31, 2007 was $23.3
million.





First
Choice utilizes a short-term VaR measure to manage its market
risk.  The VaR limit is based on the same total portfolio approach as
the GEaR measure; however, the VaR measure is intended to capture the effects of
changes in market prices over a 10-day holding period.  This holding
period is considered appropriate given the nature of First Choice’s supply
portfolio and the constraints faced by First Choice in the ERCOT
market.  The calculation utilizes the same Monte Carlo simulation
approach described above at a 95% confidence level.  The VaR amount
for these transactions was $1.0 million at December 31, 2008.  For the
year ended December 31, 2008, the high, low and average mark-to-market VaR
amounts were $12.1 million, $0.9 million and $3.8 million.  The VaR
amount for these transactions was $4.4 million at December 31,
2007.  For the year ended December 31, 2007, the high, low and average
mark-to-market VaR amounts were $6.2 million, $0.6 million and $3.3
million.





In 2008,
FCP discontinued the use of a second VaR limit established for First Choice
speculative trading transactions, which were subject to mark-to-market
accounting as defined by SFAS 133 following the decision to cease speculative
trading activity.  This calculation
captured the effect of changes in market prices over a 3-day holding period and
utilized the same Monte Carlo simulation approach described above at a 95%
confidence level.  The use of this VaR limit ended in November 2008
pursuant to the decision to end speculative trading earlier in the
year.  During 2008, the high, low and average mark-to-market VaR
amounts were $3.5 million, less than $0.1 million and $0.6
million.  The VaR amount for these transactions was $1.7 million at
December 31, 2007.  For the year ended December 31, 2007, the high,
low and average mark-to-market VaR amounts were $4.4 million, $0.1 million and
$1.5 million.





The
Company's risk measures are regularly monitored by the Company's
RMC.  The RMC has put in place procedures to ensure that increases in
risk measures that exceed the prescribed limits are reviewed and, if deemed
necessary, acted upon to reduce exposures.  As discussed in MD&A
Results of Operations, First Choice experienced speculative pre-tax trading
losses of $47.1 million in the first quarter of 2008. These transactions
triggered exceedences of the GEaR limit and the 10-day VaR limit. These
occurrences resulted in numerous meetings between




A-67


the RMC
and First Choice management and ultimately the decision to exit the basis
transactions and speculative trading.





The VaR
and GEaR limits represent an estimate of the potential gains or losses that
could be recognized on the Company’s portfolios, subject to market risk, given
current volatility in the market, and are not necessarily indicative of actual
results that may occur, since actual future gains and losses will differ from
those estimated.  Actual gains and losses may differ due to actual
fluctuations in market prices, operating exposures, and the timing thereof, as
well as changes to the underlying portfolios during the year.





Credit
Risk





The
Company manages credit for energy commodities on a consolidated basis and uses a
credit management process to assess and monitor the financial conditions of
counterparties.  Credit exposure is regularly monitored by the RMC.
The RMC has put procedures in place to ensure that increases in credit risk
measures that exceed the prescribed limits are reviewed and, if deemed
necessary, acted upon to reduce exposures.





The
following table provides information related to credit exposure as of December
31, 2008.  The table further delineates that exposure by the credit
worthiness (credit rating) of the counterparties and provides guidance as to the
concentration of credit risk to individual counterparties.





Schedule
of Credit Risk Exposure


December
31, 2008





Net(b)
            
            
            Number
            
            
            ExposureNet
            
            
            of
            
            
            ofCredit
            
            
            Counter
            
            
            Counter-Risk
            
            
            -parties
            
            
            partiesRating
      (a)
            
            Exposure
            
            
            >10%
            
            
            >10%(Dollars
      in thousands)PNMRExternal
      ratings:Investment
      grade
            
            $
            123,853
            
            
            
            3
            
            
            $
            106,428Non-investment
      grade
            
            
            7
            
            
            
            
            
            
            
            -Internal
      ratings:Investment
      grade
            
            
            2,483
            
            
            
            
            
            
            
            -Non-investment
      grade
            
            
            679
            
            
            
            
            
            
            
            -Total
            
            $
            127,022
            
            
            
            
            
            
            $
            106,428PNMExternal
      ratings:Investment
      grade
            
            $
            117,778
            
            
            
            3
            
            
            $
            106,428Non-investment
      grade
            
            
            7
            
            
            
            
            
            
            
            -Internal
      ratings:Investment
      grade
            
            
            2,483
            
            
            
            
            
            
            
            -Non-investment
      grade
            
            
            673
            
            
            
            
            
            
            
            -Total
            
            $
            120,941
            
            
            
            
            
            
            $
            106,428








(a)
            TheRatingincluded in
      “Investment Grade” is for counterparties with a minimum S&P rating of
      BBB- or Moody's rating of Baa3.  If the counterparty has
      provided a guarantee by a higher rated entity (e.g., its parent),
      determination is based on the rating of its guarantor.  The
      category “Internal Ratings - Investment Grade” includes those
      counterparties that are internally rated as investment grade in accordance
      with the guidelines established in the Company’s credit
      policy.




A-68




(b)
            The
      Net Credit Risk Exposure is the net credit exposure from
      operations.  This includes long-term contracts, forward sales
      and short-term sales. The exposure captures the net amounts from
      receivables/payables for realized transactions, delivered and unbilled
      revenues, and mark-to-market gains/losses (pursuant to contract
      terms).  Exposures are offset according to legally enforceable
      netting arrangements and reduced by credit collateral.  Credit
      collateral includes cash deposits, letters of credit and performance bonds
      received from counterparties.  Amounts are presented before
      those reserves that are determined on a portfolio
  basis.





The
following table provides an indication of the maturity of credit risk by credit
ratings of the counterparties.





Maturity
      of Credit Risk Exposure


December
31, 2008





Greater
            
            
            TotalLess
      than
            
            
            
            
            
            than
            
            
            NetRating
            
            2
      Years
            
            
            2-5
      Years
            
            
            5
      Years
            
            
            Exposure(In
      thousands)PNMRExternal
      ratings:Investment
      grade
            
            $
            116,374
            
            
            $
            7,388
            
            
            $
            91
            
            
            $
            123,853Non-investment
      grade
            
            
            7
            
            
            
            -
            
            
            
            -
            
            
            
            7Internal
      ratings:Investment
      grade
            
            
            2,483
            
            
            
            -
            
            
            
            -
            
            
            
            2,483Non-investment
      grade
            
            
            679
            
            
            
            -
            
            
            
            -
            
            
            
            679Total
            
            $
            119,543
            
            
            $
            7,388
            
            
            $
            91
            
            
            $
            127,022PNMExternal
      ratings:Investment
      grade
            
            $
            110,372
            
            
            $
            7,315
            
            
            $
            91
            
            
            $
            117,778Non-investment
      grade
            
            
            7
            
            
            
            -
            
            
            
            -
            
            
            
            7Internal
      ratings:Investment
      grade
            
            
            2,483
            
            
            
            -
            
            
            
            -
            
            
            
            2,483Non-investment
      grade
            
            
            673
            
            
            
            -
            
            
            
            -
            
            
            
            673Total
            
            $
            113,535
            
            
            $
            7,315
            
            
            $
            91
            
            
            $
            120,941





The
Company provides for losses due to market and credit risk.  Credit
risk for PNMR's and PNM’s largest counterparty as of December 31, 2008 and
December 31, 2007 was $ 52.3 million and $77.2 million.





Interest
Rate Risk





PNMR has
long-term debt which subjects it to the risk of loss associated with movements
in market interest rates.  The majority of PNMR’s long-term debt is
fixed-rate debt, and therefore, does not expose PNMR’s earnings to a major risk
of loss due to adverse changes in market interest rates.  However, the
fair value of all long-term debt instruments would increase by approximately
2.88%, if interest rates were to decline by 50 basis points from their levels at
December 31, 2008.  In general, an increase in fair value would impact
earnings and cash flows to the extent not recoverable in rates if PNM were to
reacquire all or a portion of its debt instruments in the open market prior to
their maturity.





The
securities held by PNM in the NDT and in trusts for pension and other
post-employment benefits had an estimated fair value of $495.5 million at
December 31, 2008, of which 30.9% were fixed-rate debt securities that subject
PNM to risk of loss of fair value with movements in market interest
rates.  If interest rates were to increase by 50 basis points from
their levels at December 31, 2008, the decrease in the fair value of the
fixed-rate securities would be 3.1%, or $4.9 million.  PNM does not
currently recover or return through rates any losses or gains on these
securities.  The securities held by TNMP in trusts for pension and
other post-employment benefits had an estimated fair value of $59.2 million at
December 31, 2008, of which 24.8% were fixed-rate debt securities that subject
TNMP




A-69


to risk
of loss of fair value with movements in market interest rates.  If
interest rates were to increase by 50 basis points from their levels at December
31, 2008, the decrease in the fair value of the fixed-rate securities would be
3.6%, or $0.6 million.  PNM, therefore, is at risk for shortfalls in
its funding of its obligations due to investment losses, included those from the
equity market and alternatives investment risks discussed below.





Equity
Market Risk





The NDT
and trusts established for PNM’s pension and post-employment benefits hold
certain equity securities at December 31, 2008.  These equity
securities also expose PNM to losses in fair value.  Equity securities
comprised 49.2% of the securities held by the various PNM trusts as of December
31, 2008.  PNM does not recover or earn a return through rates on any
losses or gains on these equity securities.  The trusts established
for TNMP’s pension and post-employment benefits hold certain equity
securities.  These equity securities also expose TNMP to losses in
fair value.  Equity securities comprised 43.9% of the securities held
by the TNMP trusts as of December 31, 2008.  TNMP does not recover or
earn a return through rates on any losses or gains on these equity
securities.  There has been a significant decline in the general price
levels of marketable equity securities in late 2008 and in early 2009. The
impacts of these declines on future funding and expense will not be quantified
until the funding and expense valuations for 2009 are
performed.  However, it is likely that increased levels of funding
will be required and additional amounts will be recorded as expense although the
Company does not believe the increases will materially impact its liquidity or
results of operations.





Alternatives
Investment Risk





The
Company has a target of investing 20% of its pension assets in the alternatives
asset class. This includes real estate, private equity, and hedge funds. The
private equity and hedge fund investments are limited partner structures that
are multi-manager multi-strategy funds. This investment approach gives broad
diversification and minimizes risk compared to a direct investment in any one
component of the funds. The general partner oversees the selection and
monitoring of the underlying managers. The Company’s Corporate Investment
Committee, assisted by its investment consultant, monitors the performance of
the funds and general partner’s investment process. There is risk associated
with these funds due to the nature of the strategies and techniques and the use
of investments that do not have readily determinable fair value.  The
valuation of the alternative asset class has also been impacted by the
significant decline in the general price levels of marketable equity
securities.











A-70


ITEM
      8.
            FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA





PNM
RESOURCES, INC. AND SUBSIDIARIES


PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES


TEXAS-NEW
MEXICO POWER COMPANY AND SUBSIDIARIES





INDEX











PageManagement’s
      Annual Reports on Internal Control Over Financial
Reporting
            B-2Reports
      of Independent Registered Public Accounting Firm
            B-5Financial
      Statements:PNM
      Resources, Inc. and SubsidiariesConsolidated
      Statements of Earnings (Loss)
            B-10Consolidated
      Balance Sheets
            B-11Consolidated
      Statements of Cash Flows
            B-13Consolidated
      Statements of Changes in Common Stockholders’ Equity
            B-15Consolidated
      Statements of Comprehensive Income (Loss)
            B-16Public
      Service Company of New Mexico and SubsidiariesConsolidated
      Statements of Earnings (Loss)
            B-17Consolidated
      Balance Sheets
            B-18Consolidated
      Statements of Cash Flows
            B-20Consolidated
      Statements of Changes in Common Stockholder’s Equity
            B-22Consolidated
      Statements of Comprehensive Income (Loss)
            B-23Texas-New
      Mexico Power Company and SubsidiariesConsolidated
      Statements of Earnings (Loss)
            B-24Consolidated
      Balance Sheets
            B-25Consolidated
      Statements of Cash Flows
            B-27Consolidated
      Statements of Changes in Common Stockholder’s Equity
            B-29Consolidated
      Statements of Comprehensive Income (Loss)
            B-30Notes
      to Consolidated Financial Statements
            B-31Supplementary
      Data:Reports of Independent Registered Public Accounting Firm on
      Schedules
            B-116Schedule I Condensed Financial Information of Parent
    Company
            B-118Schedule II Valuation and Qualifying Accounts
            B-121








B-1


Management’s
Annual Report on Internal Control Over Financial Reporting








Management
of PNM Resources, Inc. and subsidiaries (“PNMR”) is responsible for establishing
and maintaining adequate internal control over financial reporting as defined in
Rule 13a-15(f) under the Securities Exchange Act of 1934, as
amended.





Management
assessed the effectiveness of PNMR’s internal control over financial reporting
based on the Internal Control
– Integrated Framework set forth by the Committee of Sponsoring
Organizations of the Treadway Commission.  Based on the assessment
performed, management concludes that PNMR’s internal control over financial
reporting was effective as of December 31, 2008.





Deloitte
& Touche LLP, an independent registered public accounting firm, has issued
an attestation report on PNMR’s internal control over financial reporting which
is included herein.








/s/ Jeffry E.
Sterba


Jeffry E.
Sterba,


Chairman
and


Chief
Executive Officer














/s/ Charles
Eldred


Charles
Eldred


Executive
Vice President and


Chief
Financial Officer


B-2


Management’s
Annual Report on Internal Control Over Financial Reporting








Management
of Public Service Company of New Mexico and subsidiaries (“PNM”) is responsible
for establishing and maintaining adequate internal control over financial
reporting as defined in Rule 13a-15(f) under the Securities Exchange Act of
1934, as amended.





Management
assessed the effectiveness of PNM’s internal control over financial reporting
based on the Internal Control
– Integrated Framework set forth by the Committee of Sponsoring
Organizations of the Treadway Commission.  Based on the assessment
performed, management concludes that PNM’s internal control over financial
reporting was effective as of December 31, 2008.





Deloitte
& Touche LLP, an independent registered public accounting firm, has issued
an attestation report on PNM’s internal control over financial reporting which
is included herein.








/s/ Patricia K.
Collawn


Patricia
K. Collawn,


President
and Chief Executive Officer











/s/ Charles
Eldred


Charles
Eldred


Executive
Vice President and


Chief
Financial Officer








B-3


Management’s
Annual Report on Internal Control Over Financial Reporting








Management
of Texas-New Mexico Power Company and subsidiaries (“TNMP”) is responsible for
establishing and maintaining adequate internal control over financial reporting
as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as
amended.





Management
assessed the effectiveness of TNMP’s internal control over financial reporting
based on the Internal Control
– Integrated Framework set forth by the Committee of Sponsoring
Organizations of the Treadway Commission.  Based on the assessment
performed, management concludes that TNMP’s internal control over financial
reporting was effective as of December 31, 2008.





This
annual report does not include an attestation report of the TNMP's registered
public accounting firm regarding internal control over financial reporting.
Management's report was not subject to attestation by the TNMP's registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the company to provide only management's report
in this annual report.














/s/ Patricia K.
Collawn


Patricia
K. Collawn,


President
and


Chief
Executive Officer














/s/ Thomas G.
Sategna


Thomas G.
Sategna


Vice
President and Controller





B-4


REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To the
Board of Directors and Stockholders of


PNM
Resources, Inc.


Albuquerque,
New Mexico





We have
audited the internal control over financial reporting of PNM Resources, Inc. and
subsidiaries (the "Company") as of December 31, 2008, based on criteria
established in Internal Control — Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission.  The Company's
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting, included in the accompanying Management’s
Annual Report on Internal Control Over Financial Reporting.  Our
responsibility is to express an opinion on the Company's internal control over
financial reporting based on our audit.





We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing, and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.





A
company's internal control over financial reporting is a process designed by, or
under the supervision of, the company's principal executive and principal
financial officers, or persons performing similar functions, and effected by the
company's board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial
statements.





Because
of the inherent limitations of internal control over financial reporting,
including the possibility of collusion or improper management override of
controls, material misstatements due to error or fraud may not be prevented or
detected on a timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting to future periods
are subject to the risk that the controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.





In our
opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2008, based on the criteria
established in Internal
Control — Integrated Frameworkissued by the Committee of Sponsoring
Organizations of the Treadway Commission.





We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated financial statements and
financial statement schedules of the Company as of and for the year ended
December 31, 2008 and our reports dated March 2, 2009, relating to the financial
statements and financial statement schedules, respectively, of the Company
expressed an unqualified opinion on those consolidated financial statements and
financial statement schedules, and included an explanatory paragraph relating to
the adoption of Statement of Financial Accounting Standards No. 123 (revised
2004), Share-Based Paymentand Statement of Financial Accounting Standards No. 158, Employers' Accounting for Defined
Benefit Pension and Other Postretirement Plans - an amendment of FASB Statements
No. 87, 88, 106, and 132Rin 2006, the adoption of Financial Accounting
Standards Board Financial Interpretation No. 48, Accounting for Uncertainty in Income
Taxes in 2007, and the adoption of Statement of Financial Accounting
Standards No. 157, Fair Value
Measurements in 2008.





/s/
DELOITTE & TOUCHE LLP




Dallas,
Texas


March 2,
2009


B-5


REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To the
Board of Directors and Stockholders of


Public
Service Company of New Mexico


Albuquerque,
New Mexico




We have
audited the internal control over financial reporting of Public Service Company
of New Mexico and subsidiaries (the "Company") as of December 31, 2008, based on
criteria established in Internal Control — Integrated
Frameworkissued by the Committee of Sponsoring Organizations of the
Treadway Commission.  The Company's management is responsible for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Management’s Annual Report on Internal Control Over
Financial Reporting.  Our responsibility is to express an opinion on the
Company's internal control over financial reporting based on our
audit.




We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing, and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.





A
company's internal control over financial reporting is a process designed by, or
under the supervision of, the company's principal executive and principal
financial officers, or persons performing similar functions, and effected by the
company's board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial
statements.





Because
of the inherent limitations of internal control over financial reporting,
including the possibility of collusion or improper management override of
controls, material misstatements due to error or fraud may not be prevented or
detected on a timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting to future periods
are subject to the risk that the controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.




In our
opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2008, based on the criteria
established in Internal
Control — Integrated Frameworkissued by the Committee of Sponsoring
Organizations of the Treadway Commission.




We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated financial statements and
financial statement schedules of the Company as of and for the year ended
December 31, 2008 and our reports dated March 2, 2009, relating to the financial
statements and financial statement schedules, respectively, of the Company
expressed an unqualified opinion on those consolidated financial statements and
financial statement schedules, and included an explanatory paragraph relating to
the adoption of Statement of Financial Accounting Standards No. 123 (revised
2004), Share-Based Paymentand Statement of Financial Accounting Standards No. 158, Employers' Accounting for Defined
Benefit Pension and Other Postretirement Plans - an amendment of FASB Statements
No. 87, 88, 106, and 132Rin 2006, the adoption of Financial Accounting
Standards Board Financial Interpretation No. 48, Accounting for Uncertainty in Income
Taxes in 2007, and the adoption of Statement of Financial Accounting
Standards No. 157, Fair Value
Measurements in 2008.




/s/
DELOITTE & TOUCHE LLP





Dallas,
Texas


March 2,
2009





B-6


REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To the
Board of Directors and Stockholders of


PNM
Resources, Inc.


Albuquerque,
New Mexico





We have
audited the accompanying consolidated balance sheets of PNM Resources, Inc. and
subsidiaries (the “Company”) as of December 31, 2008 and 2007, and the related
consolidated statements of earnings (loss), changes in common stockholders’
equity, comprehensive income (loss), and cash flows for each of the three years
in the period ended December 31, 2008. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.




In our
opinion, such consolidated financial statements present fairly, in all material
respects, the financial position of PNM Resources, Inc. and subsidiaries as of
December 31, 2008 and 2007, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2008, in
conformity with accounting principles generally accepted in the United States of
America.





As
discussed in Notes 13 and 12, respectively, the Company adopted Statement of
Financial Accounting Standards No. 123 (revised 2004), Share-Based Paymentand
Statement of Financial Accounting Standards No. 158, Employers' Accounting for Defined
Benefit Pension and Other Postretirement Plans - an amendment of FASB Statements
No. 87, 88, 106, and 132R in 2006.  As discussed in Note 11 to
the consolidated financial statements, the Company adopted Financial Accounting
Standards Board Financial Interpretation No. 48, Accounting for Uncertainty in Income
Taxes in 2007.  As discussed in Note 8 to the consolidated
financial statements, the Company adopted Statement of Financial Accounting
Standards No. 157, Fair Value
Measurements in 2008.




We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Company's internal control over financial
reporting as of December 31, 2008, based on the criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated March 2, 2009 expressed an unqualified
opinion on the Company's internal control over financial reporting.




/s/
DELOITTE & TOUCHE LLP





Dallas,
Texas


March 2,
2009








B-7


REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To the
Board of Directors and Stockholders of


Public
Service Company of New Mexico


Albuquerque,
New Mexico





We have
audited the accompanying consolidated balance sheets of Public Service Company
of New Mexico and subsidiaries (the “Company”) as of December 31, 2008 and 2007,
and the related consolidated statements of earnings (loss), changes in common
stockholder’s equity, comprehensive income (loss), and cash flows for each of
the three years in the period ended December 31, 2008. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.





In our
opinion, such consolidated financial statements present fairly, in all material
respects, the financial position of Public Service Company of New Mexico and
subsidiaries as of December 31, 2008 and 2007, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2008, in conformity with accounting principles generally accepted
in the United States of America.




As
discussed in Notes 13 and 12, respectively, the Company adopted Statement of
Financial Accounting Standards No. 123 (revised 2004), Share-Based Paymentand
Statement of Financial Accounting Standards No. 158, Employers' Accounting for Defined
Benefit Pension and Other Postretirement Plans - an amendment of FASB Statements
No. 87, 88, 106, and 132R in 2006. As discussed in Note 11 to the
consolidated financial statements, the Company adopted Financial Accounting
Standards Board Financial Interpretation No. 48, Accounting for Uncertainty in Income
Taxes in 2007.  As discussed in Note 8 to the consolidated
financial statements, the Company adopted Statement of Financial Accounting
Standards No. 157, Fair Value
Measurements in 2008.






We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Company's internal control over financial
reporting as of December 31, 2008, based on the criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated March 2, 2009 expressed an unqualified
opinion on the Company's internal control over financial reporting.







/s/
DELOITTE & TOUCHE LLP





Dallas,
Texas


March 2,
2009











B-8


REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To the
Board of Directors and
Stockholderof


Texas-New
Mexico Power Company


Fort
Worth, Texas





We have
audited the accompanying consolidated balance sheets of Texas-New Mexico Power
Company and subsidiaries (the “Company”) as of December 31, 2008 and 2007, and
the related consolidated statements of earnings (loss), statements of changes in
common stockholder’s equity, comprehensive income (loss), and cash flows for
each of the three years in the period ended December 31, 2008.  These
financial statements are the responsibility of the Company's
management.  Our responsibility is to express an opinion on these
financial statements based on our audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement.  The
Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting.  Our audits included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company's
internal control over financial reporting.  Accordingly, we express no such
opinion.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation.  We believe that our audits provide a reasonable basis
for our opinion.





In our
opinion, such consolidated financial statements present fairly, in all material
respects, the financial position of Texas-New Mexico Power Company and
subsidiaries as of December 31, 2008 and 2007, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2008, in conformity with accounting principles generally accepted
in the United States of America.





As
discussed in Notes 13 and 12, respectively, the Company adopted Statement of
Financial Accounting Standards No. 123 (revised 2004), Share-Based Paymentand
Statement of Financial Accounting Standards No. 158, Employers' Accounting for Defined
Benefit Pension and Other Postretirement Plans - an amendment of FASB Statements
No. 87, 88, 106, and 132R in 2006.  As discussed in Note 11 to
the consolidated financial statements, the Company adopted Financial Accounting
Standards Board Financial Interpretation No. 48, Accounting for Uncertainty in Income
Taxes in 2007.








/s/
DELOITTE & TOUCHE LLP





Dallas,
Texas


March 2,
2009








B-9


PNM
RESOURCES, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF EARNINGS (LOSS)





Year
      Ended December 31,2008
            
            
            2007
            
            
            2006(In
      thousands, except per share amounts)Operating
      Revenues:Electric
            
            $
            1,959,241
            
            
            $
            1,912,824
            
            
            $
            1,962,174Other
            
            
            281
            
            
            
            1,205
            
            
            
            1,186Total operating revenues
            
            
            1,959,522
            
            
            
            1,914,029
            
            
            
            1,963,360Operating
      Expenses:Cost
      of energy
            
            
            1,239,854
            
            
            
            1,121,525
            
            
            
            1,084,245Administrative
      and general
            
            
            253,311
            
            
            
            214,588
            
            
            
            218,343Energy
      production costs
            
            
            193,899
            
            
            
            201,483
            
            
            
            163,282Impairment
      of goodwill and other intangible assets
            
            
            221,769
            
            
            
            -
            
            
            
            -Regulatory
      disallowances
            
            
            30,248
            
            
            
            -
            
            
            
            -Depreciation
      and amortization
            
            
            144,362
            
            
            
            135,695
            
            
            
            130,662Transmission
      and distribution costs
            
            
            58,702
            
            
            
            57,774
            
            
            
            54,030Taxes
      other than income taxes
            
            
            47,191
            
            
            
            57,922
            
            
            
            62,965Total operating expenses
            
            
            2,189,336
            
            
            
            1,788,987
            
            
            
            1,713,527Operating income (loss)
            
            
            (229,814
            )
            
            
            125,042
            
            
            
            249,833Other
      Income and Deductions:Interest
      income
            
            
            24,096
            
            
            
            43,154
            
            
            
            36,013Gains
      (losses) on investments held by NDT
            
            
            (15,233
            )
            
            
            11,599
            
            
            
            5,844Other
      income
            
            
            6,478
            
            
            
            7,443
            
            
            
            6,114Equity
      in net earnings (loss) of Optim Energy
            
            
            (29,687
            )
            
            
            7,581
            
            
            
            -Minority
      interest in earnings of Valencia
            
            
            (7,179
            )
            
            
            -
            
            
            
            -Carrying
      charges on regulatory assets
            
            
            -
            
            
            
            -
            
            
            
            6,993Other
      deductions
            
            
            (11,266
            )
            
            
            (11,552
            )
            
            
            (6,671
            )Net other income (deductions)
            
            
            (32,791
            )
            
            
            58,225
            
            
            
            48,293Interest
      Charges:Interest
      on long-term debt
            
            
            97,691
            
            
            
            81,638
            
            
            
            84,773Other
      interest charges
            
            
            35,264
            
            
            
            38,517
            
            
            
            49,335Total interest charges
            
            
            132,955
            
            
            
            120,155
            
            
            
            134,108Earnings
      (Loss) before Income Taxes
            
            
            (395,560
            )
            
            
            63,112
            
            
            
            164,018Income
      Taxes (Benefit)
            
            
            (90,816
            )
            
            
            3,226
            
            
            
            55,530Preferred
      Stock Dividend Requirements of Subsidiary
            
            
            528
            
            
            
            528
            
            
            
            528Earnings
      (Loss) from Continuing Operations
            
            
            (305,272
            )
            
            
            59,358
            
            
            
            107,960Earnings
      from Discontinued Operations, net of IncomeTaxes
      of $22,957, $10,394,  and $8,439
            
            
            34,628
            
            
            
            15,516
            
            
            
            12,858Net
      Earnings (Loss)
            
            $
            (270,644
            )
            
            $
            74,874
            
            
            $
            120,818Earnings
      (Loss) from Continuing Operations per Common Share:Basic
            
            $
            (3.66
            )
            
            $
            0.77
            
            
            $
            1.55Diluted
            
            $
            (3.66
            )
            
            $
            0.76
            
            
            $
            1.53Net
      Earnings (Loss) per Common Share:Basic
            
            $
            (3.24
            )
            
            $
            0.98
            
            
            $
            1.73Diluted
            
            $
            (3.24
            )
            
            $
            0.96
            
            
            $
            1.71Dividends
      Declared per Common Share
            
            $
            0.605
            
            
            $
            0.920
            
            
            $
            0.880





The
accompanying notes, as they relate to PNMR, are an integral part of these
financial statements.


B-10


PNM
RESOURCES, INC. AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS





December
      31,2008
            
            
            2007(In
      thousands)ASSETSCurrent
      Assets:Cash
      and cash equivalents
            
            $
            140,619
            
            
            $
            17,763Special
      deposits
            
            
            3,480
            
            
            
            1,717Accounts
      receivable, net of allowance for uncollectible accounts of $21,466 and
      $6,021
            
            
            119,174
            
            
            
            134,325Unbilled
      revenues
            
            
            81,126
            
            
            
            74,896Other
      receivables
            
            
            73,083
            
            
            
            90,002Materials,
      supplies, fuel stock, and natural gas stored
            
            
            49,397
            
            
            
            41,312Regulatory
      assets
            
            
            1,541
            
            
            
            157Derivative
      instruments
            
            
            51,250
            
            
            
            49,257Income
      taxes receivable
            
            
            49,584
            
            
            
            39,189Current
      assets of discontinued operations
            
            
            107,986
            
            
            
            120,061Other
      current assets
            
            
            75,393
            
            
            
            37,198Total current assets
            
            
            752,633
            
            
            
            605,877Other
      Property and Investments:Investment
      in PVNGS lessor notes
            
            
            168,729
            
            
            
            192,226Equity
      investment in Optim Energy
            
            
            239,950
            
            
            
            248,094Investments
      held by NDT
            
            
            111,671
            
            
            
            139,642Other
      investments
            
            
            32,966
            
            
            
            47,749Non-utility
      property, net of accumulated depreciation of $2,582 and
    $1,570
            
            
            9,135
            
            
            
            6,968Total other property and investments
            
            
            562,451
            
            
            
            634,679Utility
      Plant:Electric
      plant in service
            
            
            4,329,169
            
            
            
            3,920,071Common
      plant in service and plant held for future use
            
            
            147,576
            
            
            
            128,1194,476,745
            
            
            
            4,048,190Less
      accumulated depreciation and amortization
            
            
            1,545,950
            
            
            
            1,464,6252,930,795
            
            
            
            2,583,565Construction
      work in progress
            
            
            202,556
            
            
            
            299,574Nuclear
      fuel, net of accumulated amortization of $16,018 and
    $15,395
            
            
            58,674
            
            
            
            52,246Net utility plant
            
            
            3,192,025
            
            
            
            2,935,385Deferred
      Charges and Other Assets:Regulatory
      assets
            
            
            629,141
            
            
            
            481,872Pension
      asset
            
            
            -
            
            
            
            17,778Goodwill
            
            
            321,310
            
            
            
            495,664Other
      intangible assets, net of accumulated amortization of $4,672 and
      $3,362
            
            
            27,167
            
            
            
            75,892Derivative
      instruments
            
            
            25,620
            
            
            
            45,694Non-current
      assets of discontinued operations
            
            
            561,915
            
            
            
            526,539Other
      deferred charges
            
            
            75,720
            
            
            
            52,756Total deferred charges and other assets
            
            
            1,640,873
            
            
            
            1,696,195$
            6,147,982
            
            
            $
            5,872,136





The
accompanying notes, as they relate to PNMR, are an integral part of these
financial statements.


B-11


PNM
RESOURCES, INC. AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS





December
      31,2008
            
            
            2007(In
      thousands, except share information)LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      Liabilities:Short-term
      debt
            
            $
            744,667
            
            
            $
            665,900Current
      installments of long-term debt
            
            
            205,694
            
            
            
            449,219Accounts
      payable
            
            
            174,068
            
            
            
            148,955Accrued
      interest and taxes
            
            
            51,618
            
            
            
            57,766Regulatory
      liabilities
            
            
            1,746
            
            
            
            -Derivative
      instruments
            
            
            33,951
            
            
            
            53,832Current
      liabilities of discontinued operations
            
            
            77,082
            
            
            
            96,003Other
      current liabilities
            
            
            139,562
            
            
            
            112,394Total current liabilities
            
            
            1,428,388
            
            
            
            1,584,069Long-term
      Debt
            
            
            1,379,011
            
            
            
            1,231,859Deferred
      Credits and Other Liabilities:Accumulated
      deferred income taxes
            
            
            572,719
            
            
            
            600,187Accumulated
      deferred investment tax credits
            
            
            23,834
            
            
            
            26,825Regulatory
      liabilities
            
            
            327,175
            
            
            
            332,372Asset
      retirement obligations
            
            
            63,492
            
            
            
            66,466Accrued
      pension liability and postretirement benefit cost
            
            
            246,136
            
            
            
            60,022Derivative
      instruments
            
            
            6,934
            
            
            
            55,206Minority
      interest in Valencia
            
            
            98,506
            
            
            
            -Non-current
      liabilities of discontinued operations
            
            
            94,615
            
            
            
            89,848Other
      deferred credits
            
            
            149,237
            
            
            
            121,342Total deferred credits and other liabilities
            
            
            1,582,648
            
            
            
            1,352,268Total liabilities
            
            
            4,390,047
            
            
            
            4,168,196Commitments
      and Contingencies (See Note 16)Cumulative
      Preferred Stock of Subsidiarywithout
      mandatory redemption requirements ($100 stated value, 10,000,000 shares
      authorized:issued
      and outstanding 115,293 shares)
            
            
            11,529
            
            
            
            11,529Convertible
      Preferred Stock, Series Awithout
      mandatory redemption requirements (no stated value, 10,000,000 shares
      authorized:issued
      and outstanding 477,800 and 0 shares)
            
            
            100,000
            
            
            
            -Common
      Stockholders’ Equity:Common
      stock outstanding (no par value, 120,000,000 shares authorized:
      issuedand
      outstanding 86,531,644 and 76,814,491 shares)
            
            
            1,288,168
            
            
            
            1,042,974Accumulated
      other comprehensive income, net of income taxes
            
            
            30,948
            
            
            
            11,208Retained
      earnings
            
            
            327,290
            
            
            
            638,229Total common stockholders’ equity
            
            
            1,646,406
            
            
            
            1,692,411$
            6,147,982
            
            
            $
            5,872,136





The
accompanying notes, as they relate to PNMR, are an integral part of these
financial statements.


B-12


PNM
RESOURCES, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS





Year
      Ended December 31,2008
            
            
            2007
            
            
            2006(In
      thousands)Cash
      Flows From Operating Activities:Net
      earnings (loss)
            
            $
            (270,644
            )
            
            $
            74,874
            
            
            $
            120,818Adjustments
      to reconcile net earnings (loss) to net cash flows from operating
      activities:Depreciation and amortization
            
            
            167,111
            
            
            
            179,396
            
            
            
            174,042Amortization of prepayments on PVNGS firm-sales contracts
            
            
            (16,637
            )
            
            
            -
            
            
            
            -Deferred income tax expense (benefit)
            
            
            (46,692
            )
            
            
            35,423
            
            
            
            46,345Equity in net (earnings) loss of Optim Energy
            
            
            29,687
            
            
            
            (7,581
            )
            
            
            -Minority interest in earnings of Valencia
            
            
            7,179
            
            
            
            -
            
            
            
            -Net unrealized losses on derivatives
            
            
            7,370
            
            
            
            9,138
            
            
            
            1,062Realized (gains) losses on investments held by NDT
            
            
            15,233
            
            
            
            (11,599
            )
            
            
            (5,844
            )Realized loss on Altura contribution
            
            
            -
            
            
            
            3,089
            
            
            
            -Impairment of goodwill and other intangible assets
            
            
            221,769
            
            
            
            3,380
            
            
            
            -Impairment of utility plant
            
            
            -
            
            
            
            19,500
            
            
            
            -Amortization of fair value of acquired Twin Oaks sales
      contract
            
            
            -
            
            
            
            (35,073
            )
            
            
            (70,851
            )Stock based compensation expense
            
            
            3,261
            
            
            
            7,557
            
            
            
            7,539Regulatory disallowances
            
            
            30,248
            
            
            
            -
            
            
            
            -Other, net
            
            
            9,211
            
            
            
            (4,992
            )
            
            
            (20,447
            )Changes in certain assets and liabilities:Accounts
      receivable and unbilled revenues
            
            
            1,234
            
            
            
            (21,014
            )
            
            
            13,839Materials,
      supplies, fuel stock, and natural gas stored
            
            
            (9,921
            )
            
            
            (104
            )
            
            
            (2,382
            )Other
      current assets
            
            
            (34,256
            )
            
            
            19,150
            
            
            
            19,375Other
      assets
            
            
            (28,300
            )
            
            
            (4,316
            )
            
            
            (6,171
            )Accounts
      payable
            
            
            2,516
            
            
            
            4,423
            
            
            
            (18,555
            )Accrued
      interest and taxes
            
            
            (16,051
            )
            
            
            (6,402
            )
            
            
            10,434Other
      current liabilities
            
            
            3,314
            
            
            
            (26,588
            )
            
            
            7,828Other
      liabilities
            
            
            12,465
            
            
            
            (15,728
            )
            
            
            (32,608
            )Net
      cash flows from operating activities
            
            
            88,097
            
            
            
            222,533
            
            
            
            244,424Cash
      Flows From Investing Activities:Utility
      plant additions
            
            
            (344,951
            )
            
            
            (455,944
            )
            
            
            (321,118
            )Proceeds
      from sales of investments held by NDT
            
            
            180,296
            
            
            
            163,642
            
            
            
            96,624Purchases
      of investments held by NDT
            
            
            (185,439
            )
            
            
            (172,327
            )
            
            
            (102,265
            )Proceeds
      from sales of utility plant
            
            
            1,458
            
            
            
            55,041
            
            
            
            -Return
      of principal on PVNGS lessor notes
            
            
            22,506
            
            
            
            22,842
            
            
            
            23,279Investments
      in Optim Energy
            
            
            -
            
            
            
            (45,040
            )
            
            
            -Distributions
      from Optim Energy
            
            
            -
            
            
            
            362,282
            
            
            
            -Change
      in restricted special deposits
            
            
            7,493
            
            
            
            (7,852
            )
            
            
            -Twin
      Oaks acquisition
            
            
            -
            
            
            
            -
            
            
            
            (481,058
            )Other,
      net
            
            
            (2,078
            )
            
            
            3,825
            
            
            
            (15,037
            )Net
      cash flows from investing activities
            
            
            (320,715
            )
            
            
            (73,531
            )
            
            
            (799,575
            )





The
accompanying notes, as they relate to PNMR, are an integral part of these
financial statements.





B-13


PNM
RESOURCES, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS





Year
      Ended December 31,2008
            
            
            2007
            
            
            2006(In
      thousands)Cash
      Flows From Financing Activities:Short-term
      borrowings (repayments), net
            
            
            78,767
            
            
            
            (98,445
            )
            
            
            432,145Long-term
      borrowings
            
            
            452,750
            
            
            
            20,000
            
            
            
            15,000Repayment
      of long-term debt
            
            
            (450,826
            )
            
            
            (102,284
            )
            
            
            -Issuance
      of common stock
            
            
            250,956
            
            
            
            4,281
            
            
            
            228,056Proceeds
      from stock option exercise
            
            
            86
            
            
            
            11,001
            
            
            
            14,072Purchase
      of common stock to satisfy stock awards
            
            
            (1,401
            )
            
            
            (18,267
            )
            
            
            (20,243
            )Excess
      tax benefits (tax shortfall) from stock-based payment
      arrangements
            
            
            (560
            )
            
            
            12
            
            
            
            1,072Payments
      received on PVNGS firm-sales contracts
            
            
            88,509
            
            
            
            -
            
            
            
            -Dividends
      paid
            
            
            (57,498
            )
            
            
            (70,336
            )
            
            
            (59,708
            )Other,
      net
            
            
            (5,312
            )
            
            
            (592
            )
            
            
            (23
            )Net
      cash flows from financing activities
            
            
            355,471
            
            
            
            (254,630
            )
            
            
            610,371Change
      in Cash and Cash Equivalents
            
            
            122,853
            
            
            
            (105,628
            )
            
            
            55,220Cash
      and Cash Equivalents at Beginning of Period
            
            
            17,791
            
            
            
            123,419
            
            
            
            68,199Cash
      and Cash Equivalents at End of Period
            
            $
            140,644
            
            
            $
            17,791
            
            
            $
            123,419Supplemental
      Cash Flow Disclosures:Interest
      paid, net of capitalized interest
            
            $
            144,944
            
            
            $
            121,845
            
            
            $
            140,459Income
      taxes paid (refunded), net
            
            $
            (2,751
            )
            
            $
            (21,390
            )
            
            $
            16,158Supplemental
      schedule of noncash investing and financing activities:As
      of June 1, 2007, PNMR contributed its ownership of Altura to Optim Energy
      at a fair value of $549.6 million after an adjustment for working capital
      changes. See Note 22. In conjunction with the contribution, PNMR
      removed Altura’s assets and liabilities from its balance sheet as
      follows:





Current
      assets
            
            
            
            
            $
            22,529Utility
      plant, net
            
            
            
            
            
            575,906Deferred
      charges
            
            
            
            
            
            46,018Total
      assets contributed
            
            
            644,453Current
      liabilities
            
            
            
            
            
            63,268Deferred
      credits and other liabilities
            
            
            
            
            
            38,095Total
      liabilities contributed
            
            
            101,363Other
      comprehensive income
            
            
            
            
            
            (12,651
            )Total
      liabilities and OCI contributed
            
            
            88,712Net
      contribution to Optim Energy
            
            
            
            
            $
            555,741Utility
      plant purchased in 2007 through assumption of long-term debt that
      eliminatesa
      portion of investment in PVNGS lessor notes in
      consolidation.  See Note 2.
            
            
            
            
            $
            41,152Activities
      related to consolidation of Valencia:Initial
      consolidation at May 30, 2008:Utility
      plant additions
            
            $
            87,310Increase
      in short-term borrowings
            
            
            82,468Minority
      interest transactions as of July 10, 2008:Reduction
      in short-term borrowings
            
            
            88,059Increase
      in minority interest in Valencia
            
            
            90,148Convertible
      preferred stock issued under forward purchase contract
upontender
      of senior unsecured notes
            
            $
            100,000





The
accompanying notes, as they relate to PNMR, are an integral part of these
financial statements.


B-14


PNM
RESOURCES, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CHANGES IN COMMON STOCKHOLDERS’ EQUITY





AccumulatedCommon
      Stock
            
            
            Other
            
            
            
            
            
            Total
      CommonNumber
      of
            
            
            Aggregate
            
            
            Comprehensive
            
            
            Retained
            
            
            Stockholders’Shares
            
            
            Value
            
            
            Income
            
            
            Earnings
            
            
            Equity(Dollars
      in thousands)Balance
      at December 31, 2005
            
            
            68,786,286
            
            
            $
            813,425
            
            
            $
            (91,589
            )
            
            $
            577,533
            
            
            $
            1,299,369Exercise
      of stock options
            
            
            -
            
            
            
            (9,641
            )
            
            
            -
            
            
            
            -
            
            
            
            (9,641
            )Tax
      benefit from exercise of stock options
            
            
            -
            
            
            
            1,072
            
            
            
            -
            
            
            
            -
            
            
            
            1,072Stock
      based compensation expense
            
            
            -
            
            
            
            7,539
            
            
            
            -
            
            
            
            -
            
            
            
            7,539Sale
      of common stock
            
            
            7,777,097
            
            
            
            226,098
            
            
            
            -
            
            
            
            -
            
            
            
            226,098Common
      stock issued to ESPP
            
            
            85,089
            
            
            
            1,958
            
            
            
            -
            
            
            
            -
            
            
            
            1,958Net
      earnings
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            120,818
            
            
            
            120,818Total
      other comprehensive income
            
            
            -
            
            
            
            -
            
            
            
            37,735
            
            
            
            -
            
            
            
            37,735SFAS
      158 transition adjustment
            
            
            -
            
            
            
            -
            
            
            
            82,763
            
            
            
            -
            
            
            
            82,763Dividends
      declared on common stock
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (62,801
            )
            
            
            (62,801
            )Balance
      at December 31, 2006
            
            
            76,648,472
            
            
            
            1,040,451
            
            
            
            28,909
            
            
            
            635,550
            
            
            
            1,704,910Exercise
      of stock options
            
            
            -
            
            
            
            (9,327
            )
            
            
            -
            
            
            
            -
            
            
            
            (9,327
            )Tax
      benefit from exercise of stock options
            
            
            -
            
            
            
            12
            
            
            
            -
            
            
            
            -
            
            
            
            12Stock
      based compensation expense
            
            
            -
            
            
            
            7,557
            
            
            
            -
            
            
            
            -
            
            
            
            7,557Sale
      of common stock
            
            
            110,134
            
            
            
            2,914
            
            
            
            -
            
            
            
            -
            
            
            
            2,914Common
      stock issued to ESPP
            
            
            55,885
            
            
            
            1,367
            
            
            
            -
            
            
            
            -
            
            
            
            1,367Net
      earnings
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            74,874
            
            
            
            74,874Total
      other comprehensive income (loss)
            
            
            -
            
            
            
            -
            
            
            
            (17,701
            )
            
            
            -
            
            
            
            (17,701
            )Adoption
      of FIN 48
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (1,576
            )
            
            
            (1,576
            )Dividends
      declared on common stock
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (70,619
            )
            
            
            (70,619
            )Balance
      at December 31, 2007
            
            
            76,814,491
            
            
            
            1,042,974
            
            
            
            11,208
            
            
            
            638,229
            
            
            
            1,692,411Adoption
      of SFAS 157
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            10,422
            
            
            
            10,422Exercise
      of stock options
            
            
            -
            
            
            
            (1,285
            )
            
            
            -
            
            
            
            -
            
            
            
            (1,285
            )Tax
      shortfall from stock-based compensation arrangements
            
            
            -
            
            
            
            (560
            )
            
            
            -
            
            
            
            -
            
            
            
            (560
            )Stock
      based compensation expense
            
            
            -
            
            
            
            3,261
            
            
            
            -
            
            
            
            -
            
            
            
            3,261Sale
      of common stock
            
            
            9,624,929
            
            
            
            249,977
            
            
            
            -
            
            
            
            -
            
            
            
            249,977Stock
      issuance costs
            
            
            -
            
            
            
            (7,177
            )
            
            
            -
            
            
            
            -
            
            
            
            (7,177
            )Common
      stock issued to ESPP
            
            
            92,224
            
            
            
            978
            
            
            
            -
            
            
            
            -
            
            
            
            978Net
      earnings (loss)
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (270,644
            )
            
            
            (270,644
            )Total
      other comprehensive income
            
            
            -
            
            
            
            -
            
            
            
            19,740
            
            
            
            -
            
            
            
            19,740Dividends
      declared on common stock
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (50,717
            )
            
            
            (50,717
            )Balance
      at December 31, 2008
            
            
            86,531,644
            
            
            $
            1,288,168
            
            
            $
            30,948
            
            
            $
            327,290
            
            
            $
            1,646,406





The
accompanying notes, as they relate to PNMR, are an integral part of these
financial statements.





B-15


PNM
RESOURCES, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME(LOSS)





Year
      Ended December 31,2008
            
            
            2007
            
            
            2006(In
      thousands)Net
      Earnings (Loss)
            
            $
            (270,644
            )
            
            $
            74,874
            
            
            $
            120,818Other
      Comprehensive Income (Loss):Unrealized Gain (Loss) on
      Investment Securities:Unrealized holding gains (losses) arising duringthe period, net of income tax (expense) benefitof $1,949, $(3,029), and $(8,403)
            
            
            (2,974
            )
            
            
            4,621
            
            
            
            12,823Reclassification adjustment for (gains) losses included innet earnings (loss), net of income tax expense (benefit)of $5,433, $4,913, and $261
            
            
            (8,290
            )
            
            
            (7,497
            )
            
            
            (398
            )Pension
      liability adjustment, net of incometax (expense) benefit of $2,642, $(948), and $(14,135)
            
            
            (4,204
            )
            
            
            1,446
            
            
            
            21,569Fair
      Value Adjustment for Designated Cash Flow Hedges:Change in fair market value, net of income tax (expense)benefit of $(26,184), $11,674, and $(7,217)
            
            
            40,376
            
            
            
            (17,889
            )
            
            
            10,873Reclassification adjustment for (gains) losses included innet earnings (loss), net of income tax expense (benefit)of $2,893, $(992), and $4,848
            
            
            (5,168
            )
            
            
            1,618
            
            
            
            (7,132
            )Total
      Other Comprehensive Income (Loss)
            
            
            19,740
            
            
            
            (17,701
            )
            
            
            37,735Comprehensive
      Income (Loss)
            
            $
            (250,904
            )
            
            $
            57,173
            
            
            $
            158,553





The
accompanying notes, as they relate to PNMR, are an integral part of these
financial statements.





B-16


PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES


A
WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.


CONSOLIDATED
STATEMENTS OF EARNINGS (LOSS)





Year
      Ended December 31,2008
            
            
            2007
            
            
            2006(In
      thousands)Electric
      Operating Revenues
            
            $
            1,242,942
            
            
            $
            1,136,974
            
            
            $
            1,115,464Operating
      Expenses:Cost
      of energy sold
            
            
            698,054
            
            
            
            638,675
            
            
            
            607,026Administrative
      and general
            
            
            120,712
            
            
            
            122,002
            
            
            
            115,648Energy
      production costs
            
            
            203,419
            
            
            
            190,828
            
            
            
            156,303Impairment
      of goodwill
            
            
            51,143
            
            
            
            -
            
            
            
            -Regulatory
      disallowances
            
            
            30,248
            
            
            
            -
            
            
            
            -Depreciation
      and amortization
            
            
            85,724
            
            
            
            83,223
            
            
            
            78,008Transmission
      and distribution costs
            
            
            37,616
            
            
            
            39,137
            
            
            
            33,127Taxes
      other than income taxes
            
            
            22,543
            
            
            
            29,138
            
            
            
            26,055Total
      operating expenses
            
            
            1,249,459
            
            
            
            1,103,003
            
            
            
            1,016,167Operating
      income (loss)
            
            
            (6,517
            )
            
            
            33,971
            
            
            
            99,297Other
      Income and Deductions:Interest
      income
            
            
            24,674
            
            
            
            41,655
            
            
            
            32,091Gains
      (losses) on investments held by NDT
            
            
            (15,233
            )
            
            
            11,599
            
            
            
            5,844Other
      income
            
            
            2,477
            
            
            
            5,137
            
            
            
            3,027Minority
      interest in earnings of Valencia
            
            
            (7,179
            )
            
            
            -
            
            
            
            -Other
      deductions
            
            
            (4,857
            )
            
            
            (5,089
            )
            
            
            (3,547
            )Net
      other income (deductions)
            
            
            (118
            )
            
            
            53,302
            
            
            
            37,415Interest
      Charges:Interest
      on long-term debt
            
            
            57,473
            
            
            
            38,534
            
            
            
            40,541Other
      interest charges
            
            
            12,395
            
            
            
            14,128
            
            
            
            6,514Total
      interest charges
            
            
            69,868
            
            
            
            52,662
            
            
            
            47,055Earnings
      (Loss) before Income Taxes
            
            
            (76,503
            )
            
            
            34,611
            
            
            
            89,657Income
      Taxes (Benefit)
            
            
            (10,029
            )
            
            
            11,220
            
            
            
            31,564Earnings
      (Loss) from Continuing Operations
            
            
            (66,474
            )
            
            
            23,391
            
            
            
            58,093Earnings
      from Discontinued Operations, net of IncomeTaxes
      of $22,957, $10,394 and $8,439
            
            
            34,628
            
            
            
            15,516
            
            
            
            12,858Net
      Earnings (Loss)
            
            
            (31,846
            )
            
            
            38,907
            
            
            
            70,951Preferred
      Stock Dividends Requirements
            
            
            528
            
            
            
            528
            
            
            
            528Net
      Earnings (Loss) Available for Common Stock
            
            $
            (32,374
            )
            
            $
            38,379
            
            
            $
            70,423





The
accompanying notes, as they relate to PNM, are an integral part of these
financial statements.


B-17


PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES


A
WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.


CONSOLIDATED
BALANCE SHEETS





December
      31,2008
            
            
            2007(In
      thousands)ASSETSCurrent
      Assets:Cash
      and cash equivalents
            
            $
            46,596
            
            
            $
            4,303Special
      deposits
            
            
            3,430
            
            
            
            1,397Accounts
      receivable, net of allowance for uncollectible accounts of $1,345 and
      $729
            
            
            74,257
            
            
            
            78,094Unbilled
      revenues
            
            
            37,350
            
            
            
            32,039Other
      receivables
            
            
            72,096
            
            
            
            79,842Affiliate
      accounts receivable
            
            
            -
            
            
            
            271Materials,
      supplies, fuel stock, and natural gas stored
            
            
            47,254
            
            
            
            39,771Regulatory
      assets
            
            
            1,541
            
            
            
            157Derivative
      instruments
            
            
            28,852
            
            
            
            14,859Current
      assets of discontinued operations
            
            
            107,986
            
            
            
            120,061Other
      current assets
            
            
            49,690
            
            
            
            28,926Total
      current assets
            
            
            469,052
            
            
            
            399,720Other
      Property and Investments:Investment
      in PVNGS lessor notes
            
            
            200,711
            
            
            
            231,582Investments
      held by NDT
            
            
            111,671
            
            
            
            139,642Other
      investments
            
            
            9,951
            
            
            
            20,733Non-utility
      property
            
            
            976
            
            
            
            976Total
      other property and investments
            
            
            323,309
            
            
            
            392,933Utility
      Plant:Electric
      plant in service
            
            
            3,430,818
            
            
            
            3,055,953Common
      plant in service and plant held for future use
            
            
            17,400
            
            
            
            18,2373,448,218
            
            
            
            3,074,190Less
      accumulated depreciation and amortization
            
            
            1,204,424
            
            
            
            1,157,7752,243,794
            
            
            
            1,916,415Construction
      work in progress
            
            
            156,997
            
            
            
            259,386Nuclear
      fuel, net of accumulated amortization of $16,018 and
    $15,395
            
            
            58,674
            
            
            
            52,246Net
      utility plant
            
            
            2,459,465
            
            
            
            2,228,047Deferred
      Charges and Other Assets:Regulatory
      assets
            
            
            494,481
            
            
            
            348,719Pension
      asset
            
            
            -
            
            
            
            2,859Derivative
      instruments
            
            
            17,744
            
            
            
            37,359Goodwill
            
            
            51,632
            
            
            
            102,775Non-current
      assets of discontinued operations
            
            
            561,915
            
            
            
            526,539Other
      deferred charges
            
            
            51,137
            
            
            
            64,449Total
      deferred charges and other assets
            
            
            1,176,909
            
            
            
            1,082,700$
            4,428,735
            
            
            $
            4,103,400





The
accompanying notes, as they relate to PNM, are an integral part of these
financial statements.





B-18


PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES


A
WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.


CONSOLIDATED
BALANCE SHEETS





December
      31,2008
            
            
            2007(In
      thousands, except share information)LIABILITIES
      AND STOCKHOLDER’S EQUITYCurrent
      Liabilities:Short-term
      debt
            
            $
            340,000
            
            
            $
            321,000Current
      installments of long-term debt
            
            
            36,000
            
            
            
            299,969Accounts
      payable
            
            
            90,502
            
            
            
            72,864Affiliate
      accounts payable
            
            
            17,607
            
            
            
            19,948Accrued
      interest and taxes
            
            
            50,125
            
            
            
            26,385Regulatory
      liabilities
            
            
            1,746
            
            
            
            -Derivative
      instruments
            
            
            7,884
            
            
            
            17,896Current
      liability of discontinued operations
            
            
            77,082
            
            
            
            96,003Other
      current liabilities
            
            
            93,131
            
            
            
            59,468Total current liabilities
            
            
            714,077
            
            
            
            913,533Long-term
      Debt
            
            
            1,019,717
            
            
            
            705,701Deferred
      Credits and Other Liabilities:Accumulated
      deferred income taxes
            
            
            414,995
            
            
            
            409,430Accumulated
      deferred investment tax credits
            
            
            23,834
            
            
            
            26,634Regulatory
      liabilities
            
            
            292,146
            
            
            
            285,782Asset
      retirement obligations
            
            
            62,696
            
            
            
            65,725Accrued
      pension liability and postretirement benefit cost
            
            
            229,683
            
            
            
            56,101Derivative
      instruments
            
            
            569
            
            
            
            47,597Minority
      interest in Valencia
            
            
            98,506
            
            
            
            -Non-current
      liabilities of discontinued operations
            
            
            94,615
            
            
            
            89,848Other
      deferred credits
            
            
            124,929
            
            
            
            98,295Total deferred credits and liabilities
            
            
            1,341,973
            
            
            
            1,079,412Total liabilities
            
            
            3,075,767
            
            
            
            2,698,646Commitments
      and Contingencies (See Note 16)Cumulative
      Preferred Stockwithout mandatory redemption requirements ($100 stated value, 10,000,000
      authorized:issued
      and outstanding 115,293 shares)
            
            
            11,529
            
            
            
            11,529Common
      Stockholder’s Equity:Common stock outstanding (no par value, 40,000,000 shares authorized:
      issuedand
      outstanding 39,117,799 shares)
            
            
            932,523
            
            
            
            932,523Accumulated other comprehensive income, net of income tax
            
            
            17,746
            
            
            
            7,580Retained earnings
            
            
            391,170
            
            
            
            453,122Total
      common stockholder’s equity
            
            
            1,341,439
            
            
            
            1,393,225$
            4,428,735
            
            
            $
            4,103,400





The
accompanying notes, as they relate to PNM, are an integral part of these
financial statements.





B-19


PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES


A
WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.


CONSOLIDATED
STATEMENTS OF CASH FLOWS





Year
      Ended December 31,2008
            
            
            2007
            
            
            2006(In
      thousands)Cash
      Flows From Operating Activities:Net
      earnings (loss)
            
            $
            (31,846
            )
            
            $
            38,907
            
            
            $
            70,951Adjustments
      to reconcile net earnings (loss) to net cash flows from operating
      activities:Depreciation and amortization
            
            
            101,458
            
            
            
            126,255
            
            
            
            119,086Amortization of prepayments on PVNGS firm-sales contracts
            
            
            (16,637
            )
            
            
            -
            
            
            
            -Deferred income tax expense (benefit)
            
            
            (7,856
            )
            
            
            16,704
            
            
            
            (6,448
            )Minority interest in earnings of Valencia
            
            
            7,179
            
            
            
            -
            
            
            
            -Net unrealized (gains) losses on derivatives
            
            
            6,629
            
            
            
            8,496
            
            
            
            (327
            )Realized (gains) losses on investments held by NDT
            
            
            15,233
            
            
            
            (11,599
            )
            
            
            (5,844
            )Impairment of utility plant
            
            
            -
            
            
            
            19,500
            
            
            
            -Regulatory allowances
            
            
            30,248
            
            
            
            -
            
            
            
            -Impairment of goodwill
            
            
            51,143
            
            
            
            -
            
            
            
            -Other, net
            
            
            (2,684
            )
            
            
            (2,315
            )
            
            
            (10,683
            )Changes in certain assets and liabilities, net of amounts
      acquired:Accounts
      receivable and unbilled revenues
            
            
            5,668
            
            
            
            17,282
            
            
            
            25,855Materials,
      supplies, fuel stock, and natural gas stored
            
            
            (9,319
            )
            
            
            1,292
            
            
            
            (1,390
            )Other
      current assets
            
            
            (21,359
            )
            
            
            13,852
            
            
            
            8,626Other
      assets
            
            
            20,572
            
            
            
            (8,931
            )
            
            
            (31,589
            )Accounts
      payable
            
            
            (3,466
            )
            
            
            (2,688
            )
            
            
            (30,440
            )Accrued
      interest and taxes
            
            
            24,643
            
            
            
            (1,683
            )
            
            
            11,726Other
      current liabilities
            
            
            4,957
            
            
            
            (17,903
            )
            
            
            (43,990
            )Other
      liabilities
            
            
            (6,989
            )
            
            
            (8,243
            )
            
            
            (8,005
            )Net cash flows from operating activities
            
            
            167,574
            
            
            
            188,926
            
            
            
            97,528Cash
      Flows From Investing Activities:Utility
      plant additions
            
            
            (277,087
            )
            
            
            (352,142
            )
            
            
            (246,159
            )Proceeds
      from sales of NDT investments
            
            
            180,295
            
            
            
            163,642
            
            
            
            96,624Purchases
      of NDT investments
            
            
            (185,439
            )
            
            
            (172,327
            )
            
            
            (102,265
            )Proceeds
      from sales of utility plant
            
            
            837
            
            
            
            55,041
            
            
            
            -Return
      of principal on PVNGS lessor notes
            
            
            26,077
            
            
            
            24,638
            
            
            
            23,279Net
      additions to restricted special deposits
            
            
            7,493
            
            
            
            (7,852
            )
            
            
            -Other,
      net
            
            
            419
            
            
            
            2,361
            
            
            
            9,354Net
      cash flows from investing activities
            
            
            (247,405
            )
            
            
            (286,639
            )
            
            
            (219,167
            )





The
accompanying notes, as they relate to PNM, are an integral part of these
financial statements.





B-20


PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES


A
WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.


CONSOLIDATED
STATEMENTS OF CASH FLOWS





Year
      Ended December 31,2008
            
            
            2007
            
            
            2006(In
      thousands)Cash
      Flows From Financing Activities:Short-term
      borrowings (repayments), net
            
            
            24,591
            
            
            
            70,725
            
            
            
            122,074Long-term
      borrowings
            
            
            350,000
            
            
            
            20,000
            
            
            
            -Repayment
      of long-term debt
            
            
            (300,000
            )
            
            
            -
            
            
            
            -Payments
      received on PVNGS firm-sales contracts
            
            
            88,509
            
            
            
            -
            
            
            
            -Dividends
      paid
            
            
            (40,528
            )
            
            
            (528
            )
            
            
            (528
            )Other,
      net
            
            
            (451
            )
            
            
            (39
            )
            
            
            (711
            )Net
      cash flows from financing activities
            
            
            122,121
            
            
            
            90,158
            
            
            
            120,835Change
      in Cash and Cash Equivalents
            
            
            42,290
            
            
            
            (7,555
            )
            
            
            (804
            )Cash
      and Cash Equivalents at Beginning of Period
            
            
            4,331
            
            
            
            11,886
            
            
            
            12,690Cash
      and Cash Equivalents at End of Period
            
            $
            46,621
            
            
            $
            4,331
            
            
            $
            11,886Supplemental
      Cash Flow Disclosures:Interest
      paid, net of capitalized interest
            
            $
            80,144
            
            
            $
            59,413
            
            
            $
            55,385Income
      taxes paid (refunded), net
            
            $
            2,050
            
            
            $
            5,604
            
            
            $
            33,238Supplemental
      schedule of noncash investing and financing activities:As
      of January 1, 2007, TNMP transferred its New Mexico operational assets and
      liabilities to PNMR through a redemption of TNMP’s common stock. PNMR
      contemporaneously contributed the TNMP New Mexico operational assets and
      liabilities to PNM. See Note 23.Current
      assets
            
            
            
            
            
            $
            15,444Other
      property and investments
            
            
            
            
            
            
            10Utility
      plant, net
            
            
            
            
            
            
            96,468Goodwill
            
            
            
            
            
            
            102,775Deferred
      charges
            
            
            
            
            
            
            1,377Total
      assets transferred from TNMP
            
            
            
            
            
            
            216,074Current
      liabilities
            
            
            
            
            
            
            17,313Long-term
      debt
            
            
            
            
            
            
            1,065Deferred
      credits and other liabilities
            
            
            
            
            
            
            30,673Total
      liabilities transferred from TNMP
            
            
            
            
            
            
            49,051Net
      assets transferred – increase in common stockholder’s
    equity
            
            
            
            
            
            $
            167,023Activities
      related to consolidation of Valencia:Initial
      consolidation at May 30, 2008:Utility
      plant additions
            
            $
            87,310Increase
      in short-term borrowings
            
            
            82,468Minority
      interest transactions as of July 10, 2008:Reduction
      in short-term borrowings
            
            
            88,059Increase
      in minority interest in Valencia
            
            
            90,148





The
accompanying notes, as they relate to PNM, are an integral part of these
financial statements.


B-21


PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES


A
WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.


CONSOLIDATED
STATEMENTS OF CHANGES IN COMMON STOCKHOLDER’S EQUITY





AccumulatedCommon
      Stock
            
            
            Other
            
            
            
            
            
            Total
      CommonNumber
      of
            
            
            Aggregate
            
            
            Comprehensive
            
            
            Retained
            
            
            Stockholder’sShares
            
            
            Value
            
            
            Income
            
            
            Earnings
            
            
            Equity(Dollars
      in thousands)Balance
      at December 31, 2005
            
            
            39,117,799
            
            
            $
            765,500
            
            
            $
            (90,515
            )
            
            $
            345,452
            
            
            $
            1,020,437Net
      earnings
            
            
            -
            
            
            
            -
            
            
            
            
            
            
            
            70,951
            
            
            
            70,951Total
      other comprehensive income
            
            
            -
            
            
            
            -
            
            
            
            17,116
            
            
            
            -
            
            
            
            17,116SFAS
      158 transition adjustment
            
            
            -
            
            
            
            -
            
            
            
            82,160
            
            
            
            -
            
            
            
            82,160Dividends
      on preferred stock
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (528
            )
            
            
            (528
            )Balance
      at December 31, 2006
            
            
            39,117,799
            
            
            
            765,500
            
            
            
            8,761
            
            
            
            415,875
            
            
            
            1,190,136Equity
      contribution from parent
            
            
            -
            
            
            
            167,023
            
            
            
            -
            
            
            
            -
            
            
            
            167,023Net
      earnings
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            38,907
            
            
            
            38,907Total
      other comprehensive income (loss)
            
            
            -
            
            
            
            -
            
            
            
            (1,181
            )
            
            
            -
            
            
            
            (1,181
            )Adoption
      of FIN 48
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (1,132
            )
            
            
            (1,132
            )Dividends
      on preferred stock
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (528
            )
            
            
            (528
            )Balance
      at December 31, 2007
            
            
            39,117,799
            
            
            
            932,523
            
            
            
            7,580
            
            
            
            453,122
            
            
            
            1,393,225Adoption
      of SFAS 157
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            10,422
            
            
            
            10,422Net
      earnings (loss)
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (31,846
            )
            
            
            (31,846
            )Total
      other comprehensive income (loss)
            
            
            -
            
            
            
            -
            
            
            
            10,166
            
            
            
            -
            
            
            
            10,166Dividends
      on preferred stock
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (528
            )
            
            
            (528
            )Dividends
      on common stock
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (40,000
            )
            
            
            (40,000
            )Balance
      at December 31, 2008
            
            
            39,117,799
            
            
            $
            932,523
            
            
            $
            17,746
            
            
            $
            391,170
            
            
            $
            1,341,439





The
accompanying notes, as they relate to PNM, are an integral part of these
financial statements.


B-22


PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES


A
WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.


CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME (LOSS)





Year
      Ended December 31,2008
            
            
            2007
            
            
            2006(In
      thousands)Net
      Earnings (Loss) Available for Common Stock
            
            $
            (32,374
            )
            
            $
            38,379
            
            
            $
            70,423Other
      Comprehensive Income (Loss):Unrealized Gain (Loss) on
      Investment Securities:Unrealized holding gains (losses) arising duringthe
      period, net of income tax (expense) benefitof
      $1,949, $(3,029), and $(8,403)
            
            
            (2,974
            )
            
            
            4,621
            
            
            
            12,823Reclassification adjustment for (gains) losses included innet
      earnings (loss), net of income tax expense benefitof
      $5,433, $4,913, and $261
            
            
            (8,290
            )
            
            
            (7,497
            )
            
            
            (398
            )Pension
      liability adjustment, net of incometax (expense) benefit of $2,123, $(777), and $(14,144)
            
            
            (3,239
            )
            
            
            1,186
            
            
            
            21,582Fair
      Value Adjustment for Designated Cash Flow Hedges:Change in fair market value, net of income tax (expense)benefit
      of $(16,415), $(972), and $5,547
            
            
            25,048
            
            
            
            1,484
            
            
            
            (8,464
            )Reclassification adjustment for (gains) losses included innet
      earnings (loss), net of income tax expense (benefit)of
      $248, $639, and $5,523
            
            
            (379
            )
            
            
            (975
            )
            
            
            (8,427
            )Total
      Other Comprehensive Income (Loss)
            
            
            10,166
            
            
            
            (1,181
            )
            
            
            17,116Comprehensive
      Income (Loss)
            
            $
            (22,208
            )
            
            $
            37,198
            
            
            $
            87,539





The
accompanying notes, as they relate to PNM, are an integral part of these
financial statements.


B-23


TEXAS-NEW
MEXICO POWER COMPANY AND SUBSIDIARIES


A
WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.


CONSOLIDATED
STATEMENTS OF EARNINGS (LOSS)





Year
      Ended December 31,2008
            
            
            2007
            
            
            2006(In
      thousands)Electric
      Operating Revenues
            
            $
            190,282
            
            
            $
            180,421
            
            
            $
            157,869Operating
      Expenses:Cost
      of energy sold
            
            
            32,671
            
            
            
            29,529
            
            
            
            27,613Administrative
      and general
            
            
            27,354
            
            
            
            29,113
            
            
            
            26,733Impairment
      of goodwill
            
            
            34,456
            
            
            
            -
            
            
            
            -Depreciation
      and amortization
            
            
            38,695
            
            
            
            30,401
            
            
            
            25,557Transmission
      and distribution costs
            
            
            21,069
            
            
            
            18,616
            
            
            
            16,450Taxes,
      other than income taxes
            
            
            18,587
            
            
            
            20,092
            
            
            
            23,249Total operating expenses
            
            
            172,832
            
            
            
            127,751
            
            
            
            119,602Operating income
            
            
            17,450
            
            
            
            52,670
            
            
            
            38,267Other
      Income and Deductions:Interest
      income
            
            
            63
            
            
            
            85
            
            
            
            922Other
      income
            
            
            3,333
            
            
            
            1,615
            
            
            
            790Carrying
      charges on regulatory assets
            
            
            -
            
            
            
            -
            
            
            
            6,993Other
      deductions
            
            
            (171
            )
            
            
            (147
            )
            
            
            (155
            )Net other income (deductions)
            
            
            3,225
            
            
            
            1,553
            
            
            
            8,550Interest
      Charges:Interest
      on long-term debt
            
            
            12,416
            
            
            
            22,364
            
            
            
            25,728Other
      interest charges
            
            
            5,924
            
            
            
            2,804
            
            
            
            3,184Net interest charges
            
            
            18,340
            
            
            
            25,168
            
            
            
            28,912Earnings
      Before Income Taxes
            
            
            2,335
            
            
            
            29,055
            
            
            
            17,905Income
      Taxes
            
            
            11,128
            
            
            
            10,647
            
            
            
            5,787Earnings
      (Loss) from Continuing Operations
            
            
            (8,793
            )
            
            
            18,408
            
            
            
            12,118Discontinued
      Operations, net of Income Taxesof $0, $0, and $1,548
            
            
            -
            
            
            
            -
            
            
            
            3,581Net
      Earnings (Loss)
            
            $
            (8,793
            )
            
            $
            18,408
            
            
            $
            15,699





The
accompanying notes, as they relate to TNMP, are an integral part of these
financial statements.





B-24


TEXAS-NEW
MEXICO POWER COMPANY AND SUBSIDIARIES


A
WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.


CONSOLIDATED
BALANCE SHEETS





December
      31,2008
            
            
            2007(In
      thousands)ASSETSCurrent
      Assets:Cash
      and cash equivalents
            
            $
            124
            
            
            $
            187Special
      deposits
            
            
            50
            
            
            
            50Accounts
      receivable
            
            
            11,457
            
            
            
            8,789Unbilled
      revenues
            
            
            6,421
            
            
            
            4,392Other
      receivables
            
            
            480
            
            
            
            1,063Affiliate
      accounts receivable
            
            
            7,110
            
            
            
            8,005Materials
      and supplies
            
            
            1,625
            
            
            
            1,425Income
      taxes receivable
            
            
            9
            
            
            
            881Other
      current assets
            
            
            958
            
            
            
            501Total current assets
            
            
            28,234
            
            
            
            25,293Other
      Property and Investments:Other
      investments
            
            
            550
            
            
            
            554Non-utility
      property
            
            
            2,111
            
            
            
            2,111Total other property and investments
            
            
            2,661
            
            
            
            2,665Utility
      Plant:Electric
      plant in service
            
            
            815,588
            
            
            
            781,355Common
      plant in service and plant held for future use
            
            
            488
            
            
            
            488816,076
            
            
            
            781,843Less
      accumulated depreciation and amortization
            
            
            291,228
            
            
            
            274,128524,848
            
            
            
            507,715Construction
      work in progress
            
            
            30,948
            
            
            
            22,493Net utility plant
            
            
            555,796
            
            
            
            530,208Deferred
      Charges and Other Assets:Regulatory
      assets
            
            
            134,660
            
            
            
            133,154Goodwill
            
            
            226,665
            
            
            
            261,121Pension
      asset
            
            
            -
            
            
            
            14,919Other
      deferred charges
            
            
            23,982
            
            
            
            5,432Total deferred charges and other assets
            
            
            385,307
            
            
            
            414,626$
            971,998
            
            
            $
            972,792





The
accompanying notes, as they relate to TNMP, are an integral part of these
financial statements.





B-25


TEXAS-NEW
MEXICO POWER COMPANY AND SUBSIDIARIES


A
WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.


CONSOLIDATED
BALANCE SHEETS





December
      31,2008
            
            
            2007(In
      thousands, except share information)LIABILITIES
      AND STOCKHOLDER’S EQUITYCurrent
      Liabilities:Short-term
      debt
            
            $
            150,000
            
            
            $
            -Short-term
      debt – affiliate
            
            
            14,100
            
            
            
            3,404Current
      installments of long-term debt
            
            
            167,690
            
            
            
            148,882Accounts
      payable
            
            
            11,846
            
            
            
            5,666Affiliate
      accounts payable
            
            
            1,238
            
            
            
            3,456Accrued
      interest and taxes
            
            
            35,118
            
            
            
            35,204Other
      current liabilities
            
            
            3,111
            
            
            
            1,785Total current liabilities
            
            
            383,103
            
            
            
            198,397Long-term
      Debt
            
            
            -
            
            
            
            167,609Deferred
      Credits and Other Liabilities:Accumulated
      deferred income taxes
            
            
            111,193
            
            
            
            120,274Accumulated
      deferred investment tax credits
            
            
            -
            
            
            
            191Regulatory
      liabilities
            
            
            35,028
            
            
            
            46,590Asset
      retirement obligations
            
            
            711
            
            
            
            662Accrued
      pension liability and postretirement benefit cost
            
            
            16,453
            
            
            
            3,922Other
      deferred credits
            
            
            1,820
            
            
            
            1,699Total deferred credits and other liabilities
            
            
            165,205
            
            
            
            173,338Total liabilities
            
            
            548,308
            
            
            
            539,344Commitments
      and Contingencies (See Note 16)Common
      Stockholder’s Equity:Common
      stock outstanding ($10 par value, 12,000,000 shares
      authorized:issued
      and outstanding 6,358 shares)
            
            
            64
            
            
            
            64Paid-in-capital
            
            
            427,320
            
            
            
            427,320Accumulated
      other comprehensive income, net of income tax
            
            
            (142
            )
            
            
            823Retained
      earnings (deficit)
            
            
            (3,552
            )
            
            
            5,241Total common stockholder’s equity
            
            
            423,690
            
            
            
            433,448$
            971,998
            
            
            $
            972,792





The
accompanying notes, as they relate to TNMP, are an integral part of these
financial statements.





B-26


TEXAS-NEW
MEXICO POWER COMPANY AND SUBSIDIARIES


A
WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.


CONSOLIDATED
STATEMENTS OF CASH FLOWS





Year
      Ended December 31,2008
            
            
            2007
            
            
            2006(In
      thousands)Cash
      Flows From Operating Activities:Net
      earnings (loss)
            
            $
            (8,793
            )
            
            $
            18,408
            
            
            $
            15,699Adjustments
      to reconcile net earnings (loss) tonet cash flows from operating activities:Depreciation and amortization
            
            
            42,418
            
            
            
            35,383
            
            
            
            33,194Impairment of goodwill
            
            
            34,456
            
            
            
            -
            
            
            
            -Deferred income tax expense (benefit)
            
            
            (7,714
            )
            
            
            (8,727
            )
            
            
            4,055Other, net
            
            
            (2,649
            )
            
            
            (2,931
            )
            
            
            (13,615
            )Changes in certain assets and liabilities:Accounts receivable and unbilled revenues
            
            
            (4,697
            )
            
            
            (10,092
            )
            
            
            408Materials
      and supplies
            
            
            (200
            )
            
            
            (46
            )
            
            
            (31
            )Other
      current assets
            
            
            449
            
            
            
            3,565
            
            
            
            1,758Other assets
            
            
            (33,434
            )
            
            
            (257
            )
            
            
            (6,443
            )Accounts payable
            
            
            6,181
            
            
            
            (2,844
            )
            
            
            4,431Accrued interest and taxes
            
            
            938
            
            
            
            52,924
            
            
            
            (4,554
            )Other current liabilities
            
            
            1
            
            
            
            (13,706
            )
            
            
            17,912Other liabilities
            
            
            14,639
            
            
            
            (461
            )
            
            
            (19,025
            )Net
      cash flows from operating activities
            
            
            41,595
            
            
            
            71,216
            
            
            
            33,789Cash
      Flows From Investing Activities:Utility
      plant additions
            
            
            (51,116
            )
            
            
            (42,725
            )
            
            
            (47,659
            )Other,
      net
            
            
            -
            
            
            
            -
            
            
            
            93Net
      cash flows from investing activities
            
            
            (51,116
            )
            
            
            (42,725
            )
            
            
            (47,566
            )





The
accompanying notes, as they relate to TNMP, are an integral part of these
financial statements.





B-27


TEXAS-NEW
MEXICO POWER COMPANY AND SUBSIDIARIES


A
WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.


CONSOLIDATED
STATEMENTS OF CASH FLOWS





Year
      Ended December 31,2008
            
            
            2007
            
            
            2006(In
      thousands)Cash
      Flow From Financing Activities:Short-term
      borrowings
            
            
            150,000
            
            
            
            -
            
            
            
            -Short-term
      borrowings (repayments), net- affiliate
            
            
            10,696
            
            
            
            3,404
            
            
            
            -Repayment
      of long-term debt
            
            
            (148,935
            )
            
            
            (100,500
            )
            
            
            -Equity
      contribution by parent
            
            
            -
            
            
            
            101,249
            
            
            
            -Dividends
      paid
            
            
            -
            
            
            
            (35,000
            )
            
            
            -Other,
      net
            
            
            (2,303
            )
            
            
            1
            
            
            
            91Net
      cash flows from financing activities
            
            
            9,458
            
            
            
            (30,846
            )
            
            
            91Change
      in Cash and Cash Equivalents
            
            
            (63
            )
            
            
            (2,355
            )
            
            
            (13,686
            )Cash
      and Cash Equivalents at Beginning of Period
            
            
            187
            
            
            
            2,542
            
            
            
            16,228Cash
      and Cash Equivalents at End of Period
            
            $
            124
            
            
            $
            187
            
            
            $
            2,542Supplemental
      Cash Flow Disclosures:Interest
      paid, net of capitalized interest
            
            $
            17,246
            
            
            $
            23,625
            
            
            $
            25,573Income
      taxes paid, (refunded) net
            
            $
            16,613
            
            
            $
            (15,529
            )
            
            $
            7,003Supplemental
      schedule of noncash investing and financing activities:As
      of January 1, 2007, TNMP transferred its New Mexico operational assets and
      liabilities to PNMR through a redemption of TNMP’s common stock. PNMR
      contemporaneously contributed the TNMP New Mexico operational assets and
      liabilities to PNM. See Note 23.Current
      assets
            
            
            
            
            
            $
            15,444Other
      property and investments
            
            
            
            
            
            
            10Utility
      plant, net
            
            
            
            
            
            
            96,468Goodwill
            
            
            
            
            
            
            102,775Deferred
      charges
            
            
            
            
            
            
            1,377Total
      assets transferred to PNM
            
            
            
            
            
            
            216,074Current
      liabilities
            
            
            
            
            
            
            17,313Long-term
      debt
            
            
            
            
            
            
            1,065Deferred
      credits and other liabilities
            
            
            
            
            
            
            30,673Total
      liabilities transferred to PNM
            
            
            
            
            
            
            49,051Net assets transferred – common stock redeemed
            
            
            
            
            
            $
            167,023





The
accompanying notes, as they relate to TNMP, are an integral part of these
financial statements.


B-28


TEXAS-NEW
MEXICO POWER COMPANY AND SUBSIDIARIES


A
WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.


CONSOLIDATED
STATEMENTS OF CHANGES IN COMMON STOCKHOLDER’S EQUITY





Accumulated
            
            
            
            
            
            TotalCommon
      Stock
            
            
            
            
            
            Other
            
            
            Retained
            
            
            CommonNumber
      of
            
            
            Aggregate
            
            
            Paid-in
            
            
            Comprehensive
            
            
            Earnings
            
            
            Stockholder’sShares
            
            
            Value
            
            
            Capital
            
            
            Income
            
            
            (Deficit)
            
            
            EquityBalance
      at December 31, 2005
            
            
            9,615
            
            
            $
            96
            
            
            $
            494,287
            
            
            $
            (29
            )
            
            $
            5,450
            
            
            $
            499,804Net
      earnings
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            15,699
            
            
            
            15,699Total
      other comprehensive income (loss)
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (13
            )
            
            
            -
            
            
            
            (13
            )SFAS
      158 transition adjustment
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            604
            
            
            
            -
            
            
            
            604Income
      taxes on goodwill adjustment
            
            
            -
            
            
            
            -
            
            
            
            (1,475
            )
            
            
            -
            
            
            
            -
            
            
            
            (1,475
            )Balance
      at December 31, 2006
            
            
            9,615
            
            
            
            96
            
            
            
            492,812
            
            
            
            562
            
            
            
            21,149
            
            
            
            514,619Redemption
      of common stock
            
            
            (3,257
            )
            
            
            (32
            )
            
            
            (166,991
            )
            
            
            -
            
            
            
            -
            
            
            
            (167,023
            )Equity
      contribution from parent
            
            
            -
            
            
            
            -
            
            
            
            101,249
            
            
            
            -
            
            
            
            -
            
            
            
            101,249Adoption
      of FIN 48
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            684
            
            
            
            684Income
      taxes on goodwill adjustment
            
            
            -
            
            
            
            -
            
            
            
            250
            
            
            
            -
            
            
            
            -
            
            
            
            250Net
      earnings
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            18,408
            
            
            
            18,408Total
      other comprehensive income
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            261
            
            
            
            -
            
            
            
            261Dividends
      on common stock
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (35,000
            )
            
            
            (35,000
            )Balance
      at December 31, 2007
            
            
            6,358
            
            
            
            64
            
            
            
            427,320
            
            
            
            823
            
            
            
            5,241
            
            
            
            433,448Net
      earnings (loss)
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (8,793
            )
            
            
            (8,793
            )Total
      other comprehensive income (loss)
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (965
            )
            
            
            -
            
            
            
            (965
            )Balance
      at December 31, 2008
            
            
            6,358
            
            
            $
            64
            
            
            $
            427,320
            
            
            $
            (142
            )
            
            $
            (3,552
            )
            
            $
            423,690





The
accompanying notes, as they relate to TNMP, are an integral part of these
financial statements.





B-29


TEXAS-NEW
MEXICO POWER COMPANY AND SUBSIDIARIES


A
WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.


CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME (LOSS)





Year
      Ended December 31,2008
            
            
            2007
            
            
            2006(In
      thousands)Net
      Earnings (Loss)
            
            $
            (8,793
            )
            
            $
            18,408
            
            
            $
            15,699Other
      Comprehensive Income (Loss):Pension
      liability adjustmentnet
      of income tax (expense) benefit of $520, $(161), and $8,
            
            
            (965
            )
            
            
            261
            
            
            
            (13
            )Total
      Other Comprehensive Income (Loss)
            
            
            (965
            )
            
            
            261
            
            
            
            (13
            )Comprehensive
      Income (Loss)
            
            $
            (9,758
            )
            
            $
            18,669
            
            
            $
            15,686





The
accompanying notes, as they relate to TNMP, are an integral part of these
financial statements.








B-30
 PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008, 2007 and 2006


(1)
            Summary
      of the Business and Significant Accounting
  Policies





Nature
of Business





PNMR is
an investor-owned holding company of energy and energy-related
businesses.  PNMR’s primary subsidiaries are PNM, TNMP, and First
Choice.  PNMR acquired TNMP and First Choice in 2005.  PNM
is a public utility with regulated operations primarily engaged in the
generation, transmission and distribution of electricity and, through January
29, 2009, the transmission, distribution and sale of natural gas.  As
described in Note 2, PNM completed the sale of its natural gas operations on
January 30, 2009.  PNM began service to TNMP’s New Mexico customers
effective January 1, 2007.  TNMP is a regulated utility operating in
Texas and through December 31, 2006 in New Mexico.  In Texas, TNMP
provides regulated transmission and distribution services.  First
Choice is a competitive retail electric provider operating in
Texas.  PNMR owns 50% of Optim Energy (formerly, EnergyCo), which is
focused on unregulated electric operations, principally within the areas of
Texas covered by ERCOT, including the development, operation and ownership of
diverse generation assets and wholesale marketing.  PNMR’s common
stock trades on the New York Stock Exchange under the symbol PNM.





Financial
Statement Preparation





The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period.  Actual results could ultimately differ from those
estimated.





Principles
of Consolidation





The
Consolidated Financial Statements of each of PNMR, PNM, and TNMP include their
accounts and those of subsidiaries in which that entity owns a majority voting
interest.  PNMR’s primary subsidiaries are PNM, TNMP, First Choice
and, through May 31, 2007, Altura.  PNM consolidates the PVNGS Capital
Trust.  PNM owns undivided interests in several jointly-owned power
plants and records its pro-rata share of the assets, liabilities and expenses
for those plants.





PNMR
shared services administrative and general expenses, which represent costs that
are primarily driven by corporate level activities, are charged to the business
segments, including Optim Energy.  These services are billed at cost,
except for Optim Energy, which includes a profit element.  Other
significant intercompany transactions between PNMR, PNM, and TNMP include energy
purchases and sales, transmission and distribution services, lease payments,
dividends paid on common stock, and interest paid by PVNGS Capital Trust to
PNM.  All intercompany transactions and balances have been
eliminated.  See Note 20.





Presentation





The Notes
to Consolidated Financial Statements include disclosures for PNMR, PNM, and
TNMP.  For discussion purposes, this report will use the term
“Company” when discussing matters of common applicability to PNMR, PNM and
TNMP.  Discussions regarding only PNMR, PNM or TNMP will be indicated
as such.





Certain
amounts in the 2007 and 2006 Consolidated Financial Statements and Notes thereto
have been reclassified to conform to the 2008 financial statement
presentation.  At December 31, 2007, PNM Gas, a segment of PNM, became
classified as held for sale and is shown as discontinued operations for all
periods presented.  See Note 2 and Note 23.


B-31
 PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008, 2007 and 2006


Accounting
for the Effects of Certain Types of Regulation





The
Company maintains its accounting records in accordance with the uniform system
of accounts prescribed by the FERC and the National Association of Regulatory
Utility Commissioners, and adopted by the NMPRC and PUCT.





Certain
of the Company's operations are regulated by the NMPRC, PUCT and the FERC and
the provisions of SFAS 71 are appliedto its regulated
operations. Regulators may assign costs to accounting periods that differ from
accounting methods applied by nonregulated utilities.  When it is probable
that regulators will permit recovery of costs through future rates, costs are
deferred as regulatory assets that otherwise would be expensed.  Likewise,
regulatory liabilities are recognized when it is probable that regulators
will require refunds through future rates or when revenue is collected for
expenditures that have not yet been incurred.  Regulatory assets and
liabilities are amortized into earnings over the authorized recovery
period.  In accordance with SFAS 71, the Company has deferred certain
costs and recorded certain liabilities pursuant to the rate actions of the FERC,
the NMPRC and the PUCT.  Information on “regulatory assets” and
“regulatory liabilities” is contained in Note 4.





Cash
and Cash Equivalents





Investments
in highly liquid investments with original maturities of three months or less at
the date of purchase are considered cash equivalents.





Utility
Plant





Utility
plant is stated at cost, which includes capitalized payroll-related costs such
as taxes, pension and other fringe benefits, administrative costs and an
allowance for funds used during construction where authorized by rate
regulation.





Repairs,
including major maintenance activities, and minor replacements of property are
expensed when incurred, except as required by regulators for ratemaking
purposes.  Major replacements are charged to utility
plant.  Gains or losses resulting from retirements or other
dispositions of regulated property in the normal course of business are credited
or charged to the accumulated provision for depreciation.





Allowance
For Funds Used During Construction





As
provided by the FERC uniform systems of accounts, an allowance for funds used
during construction is charged to utility plant for construction projects
included in rate base.  This allowance is a non-cash item designed to
enable a utility to capitalize financing costs during periods of construction of
property subject to rate regulation.  It represents the cost of
borrowed funds (allowance for borrowed funds used during construction) and a
return on other funds (allowance for equity funds used during
construction).





In 2008,
2007, and 2006, PNM recorded $7.9 million, $7.7 million, and $4.1 million of
allowance for funds used during construction on certain projects and TNMP
recorded $1.0 million, $0.4 million, and $0.5 million.





Capitalized
Interest





In
accordance with SFAS 34, PNMR capitalizes interest on its construction projects
not included in rate base and on major computer software
projects.  Interest was capitalized at the overall weighted average
borrowing rate of 6.5%, 6.0%, and 5.9% for 2008, 2007, and
2006.  PNMR’s capitalized interest was $0.8 million $4.1 million, and
$3.0 million in 2008, 2007, and 2006; PNM's was $0.5 million, $3.7 million and
$1.9 million; and TNMP's was less than $0.1 in each year.





Carrying
Charges on Stranded Costs







B-32


PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008, 2007 and 2006
 TNMP’s
estimate of allowable carrying charges on stranded costs that it may recover
from its transmission





Materials,
Supplies, Fuel Stock, and Natural Gas Stored





Materials
and supplies relate to transmission, distribution and generating
assets.  Materials and supplies are charged to inventory when
purchased and are expensed or capitalized as appropriate when
issued.  Materials and supplies are valued using an average costing
method.  Obsolete materials and supplies are expensed when
identified.





Natural
gas in underground storage was valued using a weighted average
method.  Withdrawals were charged to sales service customers through
the PGAC.





Coal is
valued using a rolling weighted average costing method that is updated based on
the current period cost per ton.  Periodic aerial surveys are
performed on the coal piles and adjustments are made.





Inventories
consisted of the following at December 31:





PNMR
            
            
            PNM
            
            
            TNMP2008
            
            
            2007
            
            
            2008
            
            
            2007
            
            
            2008
            
            
            2007(In
      thousands)Coal
            
            $
            16,884
            
            
            $
            11,803
            
            
            $
            16,884
            
            
            $
            11,803
            
            
            $
            -
            
            
            $
            -Gas
      in underground storage
            
            
            9,886
            
            
            
            8,121
            
            
            
            9,886
            
            
            
            8,121
            
            
            
            -
            
            
            
            -Materials
      and supplies
            
            
            35,362
            
            
            
            32,256
            
            
            
            33,219
            
            
            
            30,715
            
            
            
            1,625
            
            
            
            1,42562,132
            
            
            
            52,180
            
            
            
            59,989
            
            
            
            50,639
            
            
            
            1,625
            
            
            
            1,425Discontinued
      operations
            
            
            12,735
            
            
            
            10,868
            
            
            
            12,735
            
            
            
            10,868
            
            
            
            -
            
            
            
            -Continuing
      operations
            
            $
            49,397
            
            
            $
            41,312
            
            
            $
            47,254
            
            
            $
            39,771
            
            
            $
            1,625
            
            
            $
            1,425





Investments





In 1985
and 1986, PNM entered into eleven operating leases for interests in certain
PVNGS generation facilities (see Note 7).  The remaining 10.3% and
10.15% lessor notes that were issued by the owners of the assets subject to
these leases were subsequently purchased by and are now held by the PVNGS
Capital Trust, which is consolidated by PNM.  Nine leases continue in
existence and are classified as operating leases.  PNM understands
that the PVNGS Capital Trust intends to hold the lessor notes until such notes
mature.  Similarly, in 1985 PNM entered into two operating leases for
the EIP transmission line for which the owners had issued lessor
notes.  In 2003, PNM acquired a 60% ownership interest in the EIP
collapsing the lease relating to it and in 2004 purchased the outstanding lessor
note relating to the remaining 40% interest.  The remaining EIP lessor
note bears interest at 10.25%, matures in 2012, and is carried on the
Consolidated Balance Sheet in other investments at $8.6 million and $9.8 million
as of December 31, 2008 and 2007.  Both the PVNGS and EIP lessor notes
are carried at amortized cost.





The
Company’s other investments, including the NDT, are comprised of United States,
state, and municipal government obligations and corporate
securities.  All investments are held in the Company’s name and are in
the custody of major financial institutions.  The specific
identification method is used to determine the cost of securities disposed of,
with realized gains and losses reflected in other income and
deductions.  At December 31, 2008 and 2007, substantially all of these
investments were classified as available for sale.  PNM holds
investment securities in the NDT.  In accordance with SFAS 115, PNM
evaluates these investment securities for impairment on an on-going
basis.  Since third party investment managers have sole discretion
over the purchase and sales of the NDT securities, PNM records a realized loss
as an impairment for any security that has a market value that is less than cost
at the end of each quarter.  For the years ended December 31, 2008,
2007 and 2006, PNM recorded impairment losses on securities held in the nuclear
decommissioning trust of $12.3 million, $1.8 million and $0.6
million.  No gains or


B-33


PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008, 2007 and 2006





Investment
in Optim Energy (formerly known as EnergyCo)





PNMR
accounts for its investment in Optim Energy using the equity method of
accounting because PNMR’s ownership interest results in significant influence,
but not control, over Optim Energy and its operations.  PNMR records
as income its percentage share of earnings or loss of Optim Energy and carries
its investment at cost, adjusted for its share of undistributed earnings or
losses.  The difference between PNMR’s book value of its investment in
Optim Energy and its proportionate share of Optim Energy’s equity is being
amortized into results of operations over the useful lives of the underlying
assets and contractual periods of the liabilities that resulted in the
difference. See Note 22.





Goodwill
and Other Intangible Assets





Under the
provisions of SFAS 142, the Company does not amortize
goodwill.  Certain intangible assets are amortized over their
estimated useful lives.  Goodwill and non-amortizable other intangible
assets are evaluated for impairment annually, or more frequently if events and
circumstances indicate that the goodwill and intangible assets might be
impaired.  Amortizable other intangible assets are amortized over the
shorter of their economic or legal lives and are evaluated for impairment when
events and circumstances indicate that the assets might be
impaired.  Impairments recorded in 2008 are discussed in Note
25.





Asset
Impairment





Tangible
long-lived assets are evaluated in relation to the future undiscounted cash
flows to assess recoverability in accordance with SFAS 144 when events and
circumstances indicate that the assets might be impaired.  Impairment
testing of power generation assets excluded from jurisdictional rates is
performed periodically in response to changes in market conditions.





Revenue
Recognition





First
Choice, PNM and TNMP record electric and gas operating revenues, as applicable,
in the period of delivery, which includes estimated amounts for service rendered
but unbilled at the end of each accounting period.





The
determination of the energy sales by PNM, TNMP and First Choice to individual
customers is based on the reading of their meters, which occurs on a systematic
basis throughout the month.  At the end of each month, amounts of
energy delivered to customers since the date of the last meter reading and the
corresponding unbilled revenue are estimated.  Unbilled electric
revenue is estimated based on the daily generation volumes, estimated customer
usage by class, weather factors, line losses and applicable customer rates based
on regression analyses reflecting historical trends and experience.





PNM’s gas
operations, which were sold on January 30, 2009 and are reflected as
discontinued operations, purchased gas on behalf of its end-use sales-service
customers while other marketers or producers purchased gas on behalf of their
end-use transportation-service customers.  PNM collected a cost of
service revenue for the transportation, delivery, and customer service provided
to all on-system end-use customers.  Cost of service tariffs were set
by the NMPRC while gas commodity rates were subject to the terms of the PGAC
with oversight provided by the NMPRC.





PNM’s
wholesale electricity sales are recorded as operating revenues and the wholesale
electricity purchases are recorded as costs of energy sold.  In
accordance with EITF 03-11, derivative contracts that are net settled or
“booked-out” are recorded net in earnings.  A book-out is the planned
or unplanned netting of off-setting purchase and sale transactions.  A
book-out is a transmission mechanism to reduce congestion on the transmission
system or administrative burden (see further discussion below in
Derivatives).  For accounting purposes, a book-out is the recording of
net revenues upon the settlement of a derivative contract.


B-34
 PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008, 2007 and 2006


Unrealized
gains and losses on contracts that do not qualify for the normal purchases or
normal sales exception or are not designated for hedge accounting are classified
as trading transactions or economic hedges.  Trading transactions are
defined as derivative instruments used to take advantage of existing market
opportunities.  Changes in the fair value of trading transactions are
reflected on a net basis in operating revenues.  The Company stopped
entering into speculative trading transactions during 2008.  Economic
hedges are defined as derivative instruments, including long-term power
agreements, used to hedge generation assets and purchase power
costs.  Changes in the fair value of economic hedges are reflected in
results of operations, with changes related to economic hedges on sales included
in operating revenues and changes related to economic hedges on purchases
included in cost of energy sold.





Depreciation
and Amortization





PNM’s
provision for depreciation and amortization of utility plant, other than nuclear
fuel, is based upon straight-line rates approved by the
NMPRC.  Nuclear fuel is based on
units-of-production.  TNMP’s provision for depreciation and
amortization of utility plant is based upon straight-line rates approved by the
PUCT and, through December 31, 2006, by the NMPRC.  Depreciation of
non-utility property is computed based on the straight-line
method.  The provision for depreciation of certain equipment is
allocated between depreciation expense and construction projects based on the
use of the equipment.  Average rates used are as follows:





2008
            
            2007
            
            2006PNMElectric
      plant
            
            
            2.35%
            
            
            2.42%
            
            
            2.43%Gas
      plant
            
            
            2.75%
            
            
            2.82%
            
            
            2.86%Common
      plant
            
            
            4.24%
            
            
            6.32%
            
            
            7.55%TNMPElectric
      plant and common plant
            
            
            3.44%
            
            
            3.48%
            
            
            3.53%





Amortization
of Debt Acquisition Costs





Discount,
premium and expense related to the issuance of long-term debt are amortized over
the lives of the respective issues.  Gains and losses incurred upon
the early retirement of long-term debt are recognized in other income or
deductions, except for amounts attributable to NMPRC or PUCT regulation, which
are amortized over the lives of the respective issues.





Derivatives





The
Company follows SFAS 133, which requires derivative instruments to be recorded
in the balance sheet as either an asset or liability measured at their fair
value.  SFAS 133 also requires that changes in the derivatives’ fair
value be recognized currently in earnings unless specific hedge accounting or
normal purchase and sale criteria are met.  Special accounting for
qualifying hedges allows derivative gains and losses to offset related change in
value of the hedged item in the statement of earnings, and requires that a
company must formally document, designate, and assess the effectiveness of
transactions that receive hedge accounting.  SFAS 133 provides that
the effective portion of the gain or loss on a derivative instrument designated
and qualifying as a cash flow hedging instrument be reported as a component of
AOCI and be reclassified into earnings in the period during which the hedged
forecasted transaction affects earnings.  The results of hedge
ineffectiveness and the portion of the change in fair value of a derivative that
an entity has chosen to exclude from hedge effectiveness are required to be
presented in current earnings.  See Note 8.





Under
SFAS 133, the Company treats all forward electric purchases and sales contracts
subject to unplanned netting or book-out by the transmission provider as
derivative instruments subject to mark-to-market accounting, unless the contract
qualifies for the normal exception by meeting the definition in SFAS 133 of a
capacity contract. Under this definition, the contract cannot permit net
settlement, the seller must have the resources to serve the contract and the
buyer must be a load serving entity.


B-35
 PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008, 2007 and 2006




In
addition, the Company follows the provisions of EITF 02-3. Under EITF 02-3all energy contracts
held for trading purposes are presented on a net margin basis in the statement
of earnings.  Energy contracts that do not meet the definition of a
derivative under SFAS 133 are recognized in current earnings and are not marked
to market.





EITF
03-11 gives guidance on whether realized gains and losses on derivative
contracts not held for trading purposes should be reported on a net or gross
basis and concludes such classification is a matter of judgment that depends on
the relevant facts and circumstances.  PNM nets all realized gains and
losses on derivative transactions that do not physically deliver and that are
offset by similar transactions during settlement.  For the years ended
December 31, 2008, 2007, and 2006, wholesale purchases of $12.6 million, $122.0
million, and $48.5 million were netted with electric revenues in the
Consolidated Statements of Earnings.





Decommissioning
Costs





PNM owns
and leases nuclear and fossil-fuel generating facilities that are within and
outside of its retail service areas.  In accordance with SFAS 143, PNM
is only required to recognize and measure decommissioning liabilities for
tangible long-lived assets for which a legal obligation
exists.  Nuclear decommissioning costs and related accruals are based
on site-specific estimates of the costs for removing all radioactive and other
structures at the site.  PNM’s accruals for PVNGS Units 1, 2 and 3
have been made based on such estimates, the guidelines of the NRC and the
probability of a license extension.  PVNGS Unit 3 is excluded from
PNM’s retail rates while PVNGS Units 1 and 2 are included.  PNM
collects a provision for ultimate decommissioning of PVNGS Units 1 and 2 in its
rates and recognizes a corresponding expense and liability for these
amounts.  See Note 15.





In
connection with both the SJGS coal agreement and the Four Corners fuel
agreement, the owners are required to reimburse the mining companies for the
cost of contemporaneous reclamation as well as the costs for final reclamation
of the coal mines.  PNM considers the contemporaneous reclamation
costs part of the cost of its delivered coal costs.  See Note 16 for a
discussion of the final reclamation costs.





Pension
and Other Postretirement Benefits





See Note
12 for a discussion of pension and postretirement benefits expense, including a
discussion of the actuarial assumptions.





Stock-Based
Compensation





See Note
13 for a discussion of stock-based compensation expense.





Income
Taxes





Income
taxes are accounted for in accordance with the provisions of SFAS 109, which
uses the asset and liability method for accounting for income
taxes.  Under SFAS 109, deferred tax assets and liabilities are
recognized for the estimated future tax consequences attributable to differences
between the financial statement carrying value of existing assets and
liabilities and their respective tax basis.  Current NMPRC and PUCT
approved rates include the tax effects of the majority of these
differences.  SFAS 109 requires that rate-regulated enterprises record
deferred income taxes for temporary differences accorded flow-through treatment
at the direction of a regulatory commission.  The resulting deferred
tax assets and liabilities are recorded at the expected cash flow to be
reflected in future rates.  Because the NMPRC and the PUCT have
consistently permitted the recovery of tax effects previously flowed-through
earnings, the Company has established regulatory liabilities and assets
offsetting such deferred tax assets and liabilities.  Items accorded
flow-through treatment under rate orders, deferred income taxes and the future
ratemaking effects of such taxes, as well as corresponding regulatory assets and
liabilities, are recorded in the financial statements.


B-36
 PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008, 2007 and 2006





In July
2006, the FASB issued FIN 48, which requires that the Company recognize only the
impact of tax positions that, based on their merits, are more likely than not to
be sustained upon an IRS audit. See Note 11 for the impacts of FIN
48.





Excise
Taxes





The
Company pays certain fees or taxes which are either considered to be an excise
tax or similar to an excise tax.  Substantially all of these taxes are
recorded on a net basis in the Consolidated Statements of Earnings.





(2)
            Acquisitions,
      Dispositions and Impairments





PNM
Gas Sale





On
January 12, 2008, PNM reached a definitive agreement to sell its natural gas
operations, which comprised the PNM Gas segment, to NMGC, a subsidiary of
Continental, for $620 million in cash, subject to adjustment based on the actual
level of working capital at closing. In a separate transaction conditioned upon
the sale of the natural gas operations, PNMR proposed to acquire CRHC,
Continental's regulated Texas electric transmission and distribution business,
for $202.5 million in cash. On July 22, 2008, PNMR and Continental agreed to
terminate the agreement for the acquisition of CRHC.  Under the
termination agreement, Continental agreed to pay PNMR $15.0 million upon the
closing of the PNM Gas transaction.  PNM completed the sale of PNM Gas
on January 30, 2009 and will recognize an after-tax gain of approximately $73.7
million in 2009.  PNMR will recognize an additional after-tax gain of
$9.1 million due to the CRHC termination payment.  In connection with
the sale, PNM retained obligations under the frozen PNM pension and executive
retirement plans for employees transferred to NMGC.  PNM has a
regulatory asset related to these plans, which will be removed from regulatory
assets on the date of the sale and transferred to AOCI. The after-tax charge to
AOCI is estimated to be approximately $64.8 million.





PNM used
proceeds from the sale to retire short-term debt and paid a dividend of $220.0
million to PNMR. The remaining funds were invested in a money market fund and
will be used to pay income taxes on the gain from the sale.  PNMR used
the dividend from PNM and the $15.0 million from Continental to retire debt.
There were no material prior relationships between the PNMR and Continental
parties other than in respect of the transactions described herein. PNM and PNMR
Services Company will provide certain corporate administrative and customer
service support at cost to NMGC under a transition services agreement. The
agreement term began January 30, 2009 and will continue for twelve months,
subject to early termination. See Note 23 for financial information concerning
PNM Gas, which is classified as discontinued operations in the accompanying
financial statements.





Twin
Oaks Acquisition, Impairment and Disposition





On April
18, 2006, PNMR’s wholly owned subsidiary, Altura, purchased the Twin Oaks
business, which included a 305 MW coal-fired power plant located 150 miles south
of Dallas, Texas for $480.0 million in cash plus the assumption of contracts and
liabilities.  The acquisition was accounted for using the purchase
method of accounting.  Under this method, the purchase price was
allocated and fair market value adjustments were made to the assets acquired and
the liabilities assumed.  Effective June 1, 2007, PNMR contributed
Altura, including the Twin Oaks business, to Optim Energy.  See Note
22.  The results of Twin Oaks operations have been included in the
Consolidated Financial Statements of PNMR from April 18, 2006 through May 31,
2007.  Beginning June 1, 2007, the Twin Oaks operations are included
in Optim Energy, which is accounted for by PNMR using the equity
method.  PNMR secured interim financing for Altura to close the
transaction. See Note 6.  In addition, PNMR incurred transaction and
other costs of $1.1 million.


B-37
 PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008, 2007 and 2006


The
following table presents the estimated fair values of the assets acquired and
liabilities assumed at the date of acquisition.





At
      April 18, 2006(In
      thousands)Net
      utility plant
            
            $
            594,653Current
      assets
            
            
            10,341Intangible
      assets
            
            
            25,000Deferred
      charges
            
            
            99,598Total assets acquired
            
            
            729,592Current
      liabilities
            
            
            95,758Deferred
      credits
            
            
            152,776Total liabilities assumed
            
            
            248,534Net assets acquired
            
            $
            481,058





The Twin
Oaks purchase agreement included the development rights for a possible
600-megawatt expansion of the plant, which PNMR classified as an intangible
asset with a value of $25 million at the date of acquisition.  PNMR
reassessed this valuation as of April 1, 2007 and determined that the asset was
impaired, resulting in a pre-tax loss of $3.4 million, which was recorded in
energy production costs.  In 2008, Optim Energy made a strategic
decision not to pursue the Twin Oaks expansion at this time and wrote off the
development rights as an impairment of intangible assets.





As part
of the acquisition of Twin Oaks, PNMR determined the fair value of two
contractual obligations to sell power.  The first contract obligated
PNMR to sell power through September 2007 at which time the second contract
began and extends for three years.  In comparing the pricing terms of
the contractual obligations against the forward price of electricity in the
relevant market, PNMR concluded that the contracts were below
market.  In accordance with SFAS 141, the contracts were recorded at
fair value to be amortized as an increase in operating revenue over the contract
periods.  The amortization matches the difference between the forward
price curve and the contractual obligations for each month in accordance with
the contract as of the acquisition date.  For the first contract,
$94.9 million was recorded in other current liabilities and $52.4 million was
recorded in other deferred credits for a total of $147.3 million.  For
the second contract, $29.6 million was recorded in other deferred
credits.  As of May 31, 2007, PNMR had amortized $105.9 million for
the first contract and nothing for the second contract.





The
following unaudited pro forma financial information presents a summary of PNMR’s
consolidated results of operations for the year ended December 31, 2006 assuming
the acquisition of Twin Oaks had been completed as of the beginning of the year,
including adjustments, which are based upon preliminary estimates, to reflect
the allocation of the purchase price to the acquired net assets.  The
pro forma financial information does not include synergy savings that may result
from the business combination and is not necessarily indicative of the results
of operations if the acquisition had been effective as of January 1,
2006.


B-38
 PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008, 2007 and 2006





For
      the Year EndedDecember
      31,2006(In
      thousands, except per share amounts)Operating
      revenues
            
            $
            2,023,068Operating
      expenses
            
            $
            1,750,604Earnings
      from continuing operations
            
            $
            122,839Net
      earnings
            
            $
            135,698Earnings from continuing operations per common share:Basic
            
            $
            1.76Diluted
            
            $
            1.74Net
      earnings per common share:Basic
            
            $
            1.94Diluted
            
            $
            1.92





Other





See Note
25, for a discussion of impairments of intangible assets recorded in
2008.





In 2006,
the NMPRC approved a stipulation to allow PNM to convert its 141-megawatt
combustion turbine Afton Generating Station to a combined cycle plant and bring
Afton into retail rates in its next rate case, which was anticipated to be
effective January 1, 2008.   The Afton costs, including the costs
of conversion, allowable for ratemaking were stipulated to be the lower of the
actual cost or $187.6 million. The combined cycle plant was declared
commercial on October 12, 2007 and began being included  in PNM’s
retail rates in May 2008.  During the final start-up stages, problems
were encountered that required piping modifications and significant
problems were encountered with the control software and
interfaces.  Furthermore, the new turbine and generator experienced
problems that required inspection of all five bearings.  The
combination of these issues caused delays and increased costs.  The
total Afton costs exceeded the stipulated maximum amount and the excess will not
be recoverable in rates. Therefore, the Afton asset has been impaired, as
defined under GAAP.   A pre-tax impairment charge of $19.5
million ($11.8 million after income taxes) was recorded in 2007 by PNM in energy
production costs.





On June
29, 2007, a wholly-owned subsidiary of PNMR purchased 100% of a trust that owns
a 2.27% undivided interest, representing 29.8 MW, in PVNGS Unit 2 and a 0.76%
undivided interest in certain PVNGS common facilities, as well as a lease under
which such facilities are leased to PNM.  The beneficial interest in
the trust was purchased for $44.0 million in cash and the assumption of $41.2
million in long-term debt payable to PVNGS Capital Trust.  This
long-term debt offsets a portion of the investment in PVNGS lessor notes and is
eliminated in PNMR’s consolidated financial statements.  The funds for
the purchase were provided by PNMR.  The lease remains in effect and
this transaction has no impact on PNM’s consolidated financial
statements.  As described in Note 17, an application was filed with
the NMPRC to allow ownership of the purchased asset to be transferred to PNM and
for the approval of a mechanism for it to be recovered in regulated
rates.





(3)         Segment
Information





The
following segment presentation is based on the methodology that management uses
for making operating decisions and assessing performance of its various business
activities.  A reconciliation of the segment presentation to the GAAP
financial statements is provided.





As
discussed below and effective January 1, 2007, TNMP’s New Mexico operations were
transferred to PNM Electric.  See Note 23.  The 2006 segment
information does not reflect this transfer.


B-39
 PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008, 2007 and 2006


PNM
Electric





PNM
Electric includes the retail electric utility operations of PNM that are subject
to traditional rate regulation by the NMPRC.  PNM Electric provides
integrated electricity services that include the generation, transmission and
distribution of electricity for retail electric customers in New Mexico as well
as the sale of transmission to third parties and, through December 31, 2006, the
TNMP Electric segment.  PNM Electric also includes the generation and
sale of electricity into the wholesale market.  This includes the
asset optimization of PNM’s jurisdictional assets as well as the capacity of its
generating plants excluded from retail rates.   Although the FERC
has jurisdiction over the wholesale rates, they are not subject to traditional
rate regulation.





TNMP
Electric





TNMP
Electric is an electric utility operating in Texas and, through December 31,
2006, in New Mexico. TNMP’s operations are subject to traditional rate
regulation by the PUCT.  TNMP provides regulated transmission and
distribution services in Texas under the TECA.





Through
December 31, 2006, TNMP provided integrated electric services that included the
transmission, distribution, purchase and sale of electricity to its New Mexico
customers as well as transmission to third parties and to
PNM.  Effective January 1, 2007 TNMP’s New Mexico business was
transferred to PNM.  PNM was TNMP’s sole supplier for TNMP’s load in
New Mexico prior to the transfer of assets to PNM.





PNM
Gas





PNM Gas
distributed natural gas to most of the major communities in New Mexico, subject
to traditional rate regulation by the NMPRC.  The customer base of PNM
Gas included both sales-service customers and transportation-service
customers.  PNM Gas purchased natural gas in the open market and sold
it at cost to its sales-service customers.  As a result, increases or
decreases in gas revenues resulting from gas price fluctuations did not impact
gross margin or earnings.  As described in Note 2, PNM completed the
sale of its gas operations on January 30, 2009.  PNM Gas is reported
as discontinued operations in the accompanying financial statements and is not
included in the segment information presented below.  Financial
information regarding PNM Gas is presented in Note 23.





Altura





The
Altura segment includes the results of Twin Oaks from the date of its
acquisition by PNMR on April 18, 2006 until its contribution to Optim Energy as
of June 1, 2007. See Note 2 and Note 22.





First
Choice





First
Choice is a certified retail electric provider operating in Texas, which allows
it to provide electricity to residential, small commercial, and governmental
customers.  Although First Choice is regulated in certain respects by
the PUCT, it is not subject to traditional rate regulation.





Optim
Energy





Upon the
contribution of Altura to Optim Energy, Optim Energy became a separate segment
for PNMR effective June 1, 2007.  PNMR’s investment in Optim Energy is
held in the Corporate and Other segment and is accounted for using the equity
method of accounting. Optim Energy’s revenues and expenses are not included in
PNMR’s consolidated revenues and expenses or the following
tables.  See Notes 2 and 22.





Corporate
and Other





PNMR
Services Company is included in the Corporate and Other
segment.


B-40
 PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008, 2007 and 2006


The
following tables present summarized financial information for PNMR by operating
segment. Excluding PNM Gas, which is presented as discontinued operations, PNM
has only one operating segment.  TNMP operates in only one reportable
segment.  Therefore, tabular segment information is not presented for
PNM and TNMP.  Explanations for footnotes (1) and (2) follow the
tables.





PNMR
SEGMENT INFORMATION


PNM
            
            
            TNMP
            
            
            First
            
            
            Corporate2008
            
            Electric
            
            
            Electric
            
            
            Choice
            
            
            and
      Other
            
            
            Consolidated(In
      thousands)Operating
      revenues
            
            $
            1,242,837
            
            
            $
            135,068
            
            
            $
            582,224
            
            
            $
            (607
            )
            
            $
            1,959,522Intersegment
      revenues
            
            
            105
            
            
            
            55,214
            
            
            
            -
            
            
            
            (55,319
            )
            
            
            -Total
      revenues
            
            
            1,242,942
            
            
            
            190,282
            
            
            
            582,224
            
            
            
            (55,926
            )
            
            
            1,959,522Cost
      of energy
            
            
            698,054
            
            
            
            32,671
            
            
            
            564,326
            
            
            
            (55,197
            )
            
            
            1,239,854Gross
      margin
            
            
            544,888
            
            
            
            157,611
            
            
            
            17,898
            
            
            
            (729
            )
            
            
            719,668Other
      operating expenses
            
            
            465,681
            
            
            
            101,466
            
            
            
            238,386
            
            
            
            (413
            )
            
            
            805,120Depreciation
      and amortization
            
            
            85,724
            
            
            
            38,695
            
            
            
            2,360
            
            
            
            17,583
            
            
            
            144,362Operating
      income (loss)
            
            
            (6,517
            )
            
            
            17,450
            
            
            
            (222,848
            )
            
            
            (17,899
            )
            
            
            (229,814
            )Interest
      income
            
            
            24,674
            
            
            
            63
            
            
            
            1,587
            
            
            
            (2,228
            )
            
            
            24,096Equity
      in net earnings (loss) of Optim Energy
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (29,687
            )
            
            
            (29,687
            )Other
      income (deductions)
            
            
            (24,792
            )
            
            
            3,162
            
            
            
            112
            
            
            
            (5,682
            )
            
            
            (27,200
            )Net
      interest charges
            
            
            (69,868
            )
            
            
            (18,340
            )
            
            
            (3,985
            )
            
            
            (40,762
            )
            
            
            (132,955
            )Segment
      earnings (loss) before income taxes
            
            
            (76,503
            )
            
            
            2,335
            
            
            
            (225,134
            )
            
            
            (96,258
            )
            
            
            (395,560
            )Income
      taxes (benefit)
            
            
            (10,029
            )
            
            
            11,128
            
            
            
            (47,561
            )
            
            
            (44,354
            )
            
            
            (90,816
            )Preferred
      stock dividend requirements
            
            
            528
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            528Segment
      earnings (loss) from continuingoperations
            
            $
            (67,002
            )
            
            $
            (8,793
            )
            
            $
            (177,573
            )
            
            $
            (51,904
            )
            
            $
            (305,272
            )Gross
      property additions (1)
            
            $
            240,262
            
            
            $
            51,116
            
            
            $
            3,872
            
            
            $
            12,876
            
            
            $
            308,126At
      December 31, 2008:Total
      Assets(2)
            
            $
            3,758,834
            
            
            $
            971,998
            
            
            $
            253,048
            
            
            $
            494,201
            
            
            $
            5,478,081Goodwill
            
            $
            51,632
            
            
            $
            226,665
            
            
            $
            43,013
            
            
            $
            -
            
            
            $
            321,310







B-41
 PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008, 2007 and 2006




2007
            
            PNM
      Electric
            
            
            TNMP
      Electric
            
            
            Altura
            
            
            First
      Choice
            
            
            Corporate
      and Other
            
            
            Consolidated(In
      thousands)Operating
      revenues
            
            $
            1,136,974
            
            
            $
            109,818
            
            
            $
            65,395
            
            
            $
            600,617
            
            
            $
            1,225
            
            
            $
            1
      ,914,029Intersegment
      revenues
            
            
            -
            
            
            
            70,603
            
            
            
            -
            
            
            
            78
            
            
            
            (70,681
            )
            
            
            -Total
      revenues
            
            
            1,136,974
            
            
            
            180,421
            
            
            
            65,395
            
            
            
            600,695
            
            
            
            (69,456
            )
            
            
            1,914,029Cost
      of energy
            
            
            638,675
            
            
            
            29,529
            
            
            
            22,063
            
            
            
            500,755
            
            
            
            (69,497
            )
            
            
            1,121,525Gross
      margin
            
            
            498,299
            
            
            
            150,892
            
            
            
            43,332
            
            
            
            99,940
            
            
            
            41
            
            
            
            792,504Other
      operating expenses
            
            
            381,105
            
            
            
            67,821
            
            
            
            18,636
            
            
            
            57,262
            
            
            
            6,943
            
            
            
            531,767Depreciation
      and amortization
            
            
            83,223
            
            
            
            30,401
            
            
            
            7,684
            
            
            
            1,881
            
            
            
            12,506
            
            
            
            135,695Operating
      income (loss)
            
            
            33,971
            
            
            
            52,670
            
            
            
            17,012
            
            
            
            40,797
            
            
            
            (19,408
            )
            
            
            125,042Interest
      income
            
            
            41,655
            
            
            
            85
            
            
            
            146
            
            
            
            2,137
            
            
            
            (869
            )
            
            
            43,154Equity
      in net earnings of Optim Energy
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            7,581
            
            
            
            7,581Other
      income (deductions)
            
            
            11,647
            
            
            
            1,468
            
            
            
            1
            
            
            
            (56
            )
            
            
            (5,570
            )
            
            
            7,490Net
      interest charges
            
            
            (52,662
            )
            
            
            (25,168
            )
            
            
            (8,523
            )
            
            
            (763
            )
            
            
            (33,039
            )
            
            
            (120,155
            )Segment
      earnings before income taxes
            
            
            34,611
            
            
            
            29,055
            
            
            
            8,636
            
            
            
            42,115
            
            
            
            (51,305
            )
            
            
            63,112Income
      taxes (benefit)
            
            
            11,220
            
            
            
            10,647
            
            
            
            3,419
            
            
            
            14,929
            
            
            
            (36,989
            )
            
            
            3,226Preferred
      stock dividend requirements
            
            
            528
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            528Segment
      earnings (loss) from continuingoperations
            
            $
            22,863
            
            
            $
            18,408
            
            
            $
            5,217
            
            
            $
            27,186
            
            
            $
            (14,316
            )
            
            $
            59,358Gross
      property additions (1)
            
            $
            312,988
            
            
            $
            42,725
            
            
            $
            919
            
            
            $
            184
            
            
            $
            61,770
            
            
            $
            418,586At
      December 31, 2007:Total
      Assets (2)
            
            $
            3,456,800
            
            
            $
            972,792
            
            
            $
            -
            
            
            $
            367,838
            
            
            $
            428,106
            
            
            $
            5,225,536Goodwill
            
            $
            102,775
            
            
            $
            261,121
            
            
            $
            -
            
            
            $
            131,768
            
            
            $
            -
            
            
            $
            495,664


B-42
 PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008, 2007 and 2006




2006
            
            PNM
      Electric
            
            
            TNMP
      Electric
            
            
            Altura
            
            
            First
      Choice
            
            
            Corporate
              and
      Other
            
            
            Consolidated(In
      thousands)Operating
      revenues
            
            $
            1,064,350
            
            
            $
            187,935
            
            
            $
            125,131
            
            
            $
            584,759
            
            
            $
            1,185
            
            
            $
            1,963,360Intersegment
      revenues
            
            
            51,114
            
            
            
            69,055
            
            
            
            -
            
            
            
            140
            
            
            
            (120,309
            )
            
            
            -Total
      revenues
            
            
            1,115,464
            
            
            
            256,990
            
            
            
            125,131
            
            
            
            584,899
            
            
            
            (119,124
            )
            
            
            1,963,360Cost
      of energy
            
            
            607,026
            
            
            
            103,021
            
            
            
            38,860
            
            
            
            455,126
            
            
            
            (119,788
            )
            
            
            1,084,245Gross
      margin
            
            
            508,438
            
            
            
            153,969
            
            
            
            86,271
            
            
            
            129,773
            
            
            
            664
            
            
            
            879,115Other
      operating expenses
            
            
            331,133
            
            
            
            79,256
            
            
            
            12,982
            
            
            
            66,916
            
            
            
            8,333
            
            
            
            498,620Depreciation
      and amortization
            
            
            78,008
            
            
            
            31,576
            
            
            
            13,060
            
            
            
            2,026
            
            
            
            5,992
            
            
            
            130,662Operating
      income
            
            
            99,297
            
            
            
            43,137
            
            
            
            60,229
            
            
            
            60,831
            
            
            
            (13,661
            )
            
            
            249,833Interest
      income
            
            
            32,091
            
            
            
            922
            
            
            
            250
            
            
            
            2,474
            
            
            
            276
            
            
            
            36,013Other
      income (deductions)
            
            
            5,324
            
            
            
            7,901
            
            
            
            15
            
            
            
            (391
            )
            
            
            (569
            )
            
            
            12,280Net
      interest charges
            
            
            (47,055
            )
            
            
            (28,926
            )
            
            
            (20,917
            )
            
            
            (802
            )
            
            
            (36,408
            )
            
            
            (134,108
            )Segment
      earnings before income taxes
            
            
            89,657
            
            
            
            23,034
            
            
            
            39,577
            
            
            
            62,112
            
            
            
            (50,362
            )
            
            
            164,018Income
      taxes (benefit)
            
            
            31,564
            
            
            
            7,335
            
            
            
            15,668
            
            
            
            22,145
            
            
            
            (21,182
            )
            
            
            55,530Preferred
      stock dividend requirements
            
            
            528
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            528Segment
      earnings (loss) from continuingoperations
            
            $
            57,565
            
            
            $
            15,699
            
            
            $
            23,909
            
            
            $
            39,967
            
            
            $
            (29,180
            )
            
            $
            107,960Gross
      property additions (1)
            
            $
            213,929
            
            
            $
            47,659
            
            
            $
            939
            
            
            $
            272
            
            
            $
            26,089
            
            
            $
            288,888At
      December 31, 2006:Total
      Assets (2)
            
            $
            3,167,889
            
            
            $
            1,203,860
            
            
            $
            699,575
            
            
            $
            362,206
            
            
            $
            151,644
            
            
            $
            5,585,174Goodwill
            
            $
            -
            
            
            $
            363,764
            
            
            $
            -
            
            
            $
            131,974
            
            
            $
            -
            
            
            $
            495,738








Footnote
explanations for the above tables are as follows:





(1)
            Excludes
      gross property additions related to PNM Gas discontinued operations of
      $36,825, $39,154 and $32,230 for December 31, 2008, 2007, and
      2006.


(2)
            Excludes
      total assets related to PNM Gas discontinued operations of $669,901,
      $646,600, and $645,660 at December 31, 2008, 2007, and
    2006.





Major
Customers





No
individual customers accounted for more than 10% of the operating revenues of
PNMR or PNM.  First Choice is a customer of TNMP and accounted for 29%
of its operating revenues from continuing operations in 2008, 39% in 2007, and
44% in 2006.  One unaffiliated customer of TNMP accounted for 22% of
its operating revenues from continuing operations in 2008, 18% in 2007, and 14%
in 2006.





B-43
 PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008, 2007 and 2006


(4)
            Regulatory
      Assets and Liabilities





Certain
of the Company's operations are regulated by the NMPRC, PUCT and the FERC and
the provisions of SFAS 71 are appliedto its regulated
operations.  Regulatory assets represent probable future recovery of
previously incurred costs, which will be collected from customers through the
ratemaking process.  Regulatory liabilities represent probable future
reductions in revenues associated with amounts that are to be credited to
customers through the ratemaking process.  Regulatory assets and
liabilities reflected in the Consolidated Balance Sheets are presented
below.  As discussed in Note 2, on January 30, 2009, PNM completed the
sale of its gas operations.  Upon the sale, the regulatory asset
amount for pension obligations that was not transferred to NMGC of approximately
$107.3 million will be removed from regulatory assets and charged, net of income
taxes, to AOCI.  See Note 23 for information on regulatory assets and
liabilities of PNM Gas.








PNMR





December
      31,2008
            
            
            2007Assets:
            
            (In
      thousands)Current:Underground
      rate
            
            $
            1,311
            
            
            $
            -Rate
      case expense
            
            
            230
            
            
            
            -Other
            
            
            -
            
            
            
            1571,541
            
            
            
            157Non-Current:Mine
      reclamation costs
            
            
            69,747
            
            
            
            94,698Deferred
      income taxes
            
            
            74,902
            
            
            
            78,705Financing
      costs
            
            
            28,155
            
            
            
            23,579Pension
      and OPEB
            
            
            329,487
            
            
            
            126,506Loss
      on reacquired debt
            
            
            11,706
            
            
            
            15,018Renewable
      energy certificates
            
            
            -
            
            
            
            9,794Stranded
      costs
            
            
            112,008
            
            
            
            123,863Rate
      case expense
            
            
            2,298
            
            
            
            3,666Other
            
            
            838
            
            
            
            6,043629,141
            
            
            
            481,872Total
      regulatory assets
            
            $
            630,682
            
            
            $
            482,029Liabilities:Current
      - other
            
            $
            (1,746
            )
            
            $
            -Non-Current:Cost
      of removal
            
            
            (261,078
            )
            
            
            (252,502
            )Deferred
      income taxes
            
            
            (16,333
            )
            
            
            (18,161
            )Asset
      retirement obligation
            
            
            (40,929
            )
            
            
            (38,978
            )PVNGS
      prudence audit
            
            
            (2,088
            )
            
            
            (2,411
            )Pension
      and OPEB
            
            
            (1,577
            )
            
            
            (14,319
            )Energy
      efficiency credit
            
            
            (2,106
            )
            
            
            (2,214
            )Gain
      on reacquired debt
            
            
            -
            
            
            
            (90
            )TNP
      acquisition – settlement due customers
            
            
            (2,267
            )
            
            
            (2,915
            )Other
            
            
            (797
            )
            
            
            (782
            )(327,175
            )
            
            
            (332,372
            )Total regulatory liabilities
            
            $
            (328,921
            )
            
            $
            (332,372
            )





B-44
 PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008, 2007 and 2006


PNM





December
      31,2008
            
            
            2007(In
      thousands)Assets:Current:Underground
      rate
            
            $
            1,311
            
            
            $
            -Rate
      case expense
            
            
            230
            
            
            
            -Other
            
            
            -
            
            
            
            1571,541
            
            
            
            157Non-Current:Mine
      reclamation costs
            
            
            69,747
            
            
            
            94,698Deferred
      income taxes
            
            
            70,237
            
            
            
            73,543Financing
      costs
            
            
            28,155
            
            
            
            23,579Loss
      on reacquired debt
            
            
            11,706
            
            
            
            14,584Pension
      and OPEB
            
            
            313,484
            
            
            
            126,478Renewable
      energy certificates
            
            
            -
            
            
            
            9,794Rate
      case expense
            
            
            314
            
            
            
            -Other
            
            
            838
            
            
            
            6,043494,481
            
            
            
            348,719Total
      regulatory assets
            
            $
            496,022
            
            
            $
            348,876Liabilities:Current
      - other
            
            $
            (1,746
            )
            
            $
            -Non-Current:Cost
      of removal
            
            
            (229,733
            )
            
            
            (222,445
            )Deferred
      income taxes
            
            
            (16,333
            )
            
            
            (18,161
            )Asset
      retirement obligation
            
            
            (40,929
            )
            
            
            (38,978
            )PVNGS
      prudence audit
            
            
            (2,088
            )
            
            
            (2,411
            )Gain
      on reacquired debt
            
            
            -
            
            
            
            (90
            )TNP
      acquisition – settlement due customers
            
            
            (2,267
            )
            
            
            (2,915
            )Other
            
            
            (796
            )
            
            
            (782
            )$
            (292,146
            )
            
            $
            (285,782
            )Total
      regulatory liabilities
            
            $
            (293,892
            )
            
            $
            (285,782
            )





B-45
 PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008, 2007 and 2006





TNMP





December
      31,2008
            
            
            2007(In
      thousands)Assets:Non-Current:Stranded costs
            
            $
            112,008
            
            
            $
            123,864Deferred income taxes
            
            
            4,665
            
            
            
            5,162Pension and OPEB
            
            
            16,003
            
            
            
            28Loss on reacquired debt
            
            
            -
            
            
            
            434Rate case expense
            
            
            1,984
            
            
            
            3,666Total
      regulatory assets
            
            $
            134,660
            
            
            $
            133,154Liabilities:Non-Current:Cost of removal
            
            $
            (31,345
            )
            
            $
            (30,057
            )Energy efficiency credit
            
            
            (2,106
            )
            
            
            (2,214
            )Pension and OPEB
            
            
            (1,577
            )
            
            
            (14,319
            )Total
      regulatory liabilities
            
            $
            (35,028
            )
            
            $
            (46,590
            )





The
Company’s regulatory assets and regulatory liabilities are reflected in rates
charged to customers or have been addressed in a regulatory
proceeding.  The Company receives or pays a rate of return on these
regulatory assets and regulatory liabilities, except for mine reclamation costs
and financing costs.  Financing costs are amortized over the life of
the debt, with the remaining amortization periods ranging from 1 to 28
years.





The
Company is permitted, under rate regulation, to accrue and record a regulatory
liability for the estimated cost of removal and salvage associated with certain
of its assets through depreciation expense.  With the issuance of SFAS
158, actuarial losses and prior service costs are required to be recorded in
AOCI; however, the amortization of these items is recoverable through the
Company’s rates.  For information related to TNMP’s stranded costs,
see Note 17.  PNM recorded regulatory assets for renewable energy
certificates at $0.005 per KWh.  A renewable energy certificate
represents one KWh of energy produced from a renewable energy source as defined
by the New Mexico Renewable Energy Act.  The source of the renewable
energy certificates is PNM’s PPA to purchase renewable energy from the New
Mexico Wind Energy Center.  As described in Note 17, in the final
order for PNM’s 2007 electric rate case, the NMPRC disallowed recovery of costs
associated with these RECs, but did allow PNM the opportunity to seek recovery
in the next rate case if it can demonstrate that it incurred an actual
incremental cost for its compliance with the renewable portfolio
standard.  The NMPRC also ruled that recovery of coal mine
decommissioning costs should be capped at $100 million.  The order
results in PNM being unable to assert it is probable, as defined under GAAP,
that the costs previously deferred on PNM’s balance sheet will be recoverable
through future rates charged to its customers.  Accordingly, PNM
recorded regulatory disallowances for pre-tax write offs of $19.6 million for
coal mining decommissioning costs and $10.6 million for deferred REC
costs.  PNM is evaluating whether it will be successful in meeting the
criteria set forth by the NMPRC.  PNM has appealed the NMPRC’s
treatment of coal mine decommissioning and the RECs to the New Mexico Supreme
Court.  If the appeal is successful or if PNM is successful in
demonstrating that these costs are recoverable through future rate proceedings,
the costs will be restored to PNM’s balance sheet.





Based on
a current evaluation of the various factors and conditions that are expected to
impact future cost recovery, the Company believes that future recovery of its
regulatory assets are probable.








B-46
 PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008, 2007 and 2006


(5)
            Stockholders’
      Equity





Common
Stock





See Note
6 for details related to PNMR’s issuance of common stock.





As
described in Note 23, the New Mexico customers of TNMP were transferred to PNM
effective January 1, 2007.  In connection with the transfer, TNMP
transferred those operations to TNP by redeeming a portion of its common
stock.  TNP then transferred those operations to PNMR, which
transferred them to PNM as a capital contribution.





Dividends
on Common Stock





The
declaration of common dividends by PNMR is dependent upon a number of factors
including the ability of PNMR’s subsidiaries to pay dividends.  PNMR’s
primary sources of dividends are its operating subsidiaries.





PNM paid
cash dividends of $40.0 million to PNMR in 2008.  PNM did not pay any
cash dividends to PNMR in 2007 and 2006. TNMP paid cash dividends to PNMR of
$35.0 million in 2007. TNMP did not pay any cash dividends to PNMR in 2008 and
2006.  Following the sale of PNM Gas, PNM paid a dividend to PNMR of
$220.0 million on February 5, 2009.





PNM can
pay dividends to PNMR from earnings as well as equity contributions made by
PNMR.  The NMPRC has placed certain restrictions on the ability of PNM
to pay dividends to PNMR, including the restriction that PNM cannot pay
dividends that cause its debt rating to fall below investment
grade.  The NMPRC has also restricted PNM from paying dividends in any
year, as determined on a rolling four quarter basis, in excess of net earnings,
including carryover amounts, without prior NMPRC
approval.  Additionally, PNM has various financial covenants that
limit the transfer of assets, through dividends or other means.  Under
the most restrictive of such numerical tests, as of December 31, 2008, PNM would
be allowed to pay dividends to PNMR in an amount of up to approximately $221
million without seeking approval of the NMPRC or financial
counterparties.  Adjusting, on a pro forma basis, for the sale of PNM
Gas and the use of proceeds from the sale, including the payment of the $220.0
dividend to PNMR described above, PNM estimates such amount would be
approximately $186 million.





In
addition, the ability of PNMR to declare dividends is dependent upon the extent
to which cash flows will support dividends, the availability of retained
earnings, the financial circumstances and performance, the NMPRC’s and PUCT’s
decisions in various regulatory cases currently pending and which may be
docketed in the future, the effect of federal regulatory decisions,
Congressional and legislative acts and economic conditions in the United
States.  Conditions imposed by the NMPRC or PUCT, future growth plans
and the related capital requirements and business considerations may also affect
PNMR’s ability to pay dividends.





Preferred
Stock





PNMR’s
restated articles of incorporation authorize 10 million shares of preferred
stock, which may be issued without restriction.  PNMR had no preferred
stock outstanding prior to November 17, 2008, when it issued 477,800 shares of
Series A convertible preferred stock in connection with the purchase obligation
of the holder of PNMR’s private equity-linked units.  See Note
6.  The Series A convertible preferred stock is convertible into PNMR
common stock in a ratio of 10 shares of common stock for each share of preferred
stock.  The Series A convertible preferred stock is entitled to
receive dividends equivalent to any dividends paid on PNMR common stock as if
the preferred stock had been converted into common stock.  The Series
A convertible preferred stock is entitled to vote on all matters voted upon by
common stockholders, except for the election of the Board.  In the
event of liquidation of PNMR, preferred holders would receive a preference of
$0.10 per common share equivalent.  After that preference, common
holders would receive an equivalent liquidation preference per share and all
remaining distributions would be shared ratably between common and preferred
holders.  The terms of the Series A convertible preferred stock result
in it being substantially equivalent to common stock.  Therefore, for
earnings per share




B-47


PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008, 2007 and 2006





PNM’s
cumulative preferred shares outstanding bear dividends at 4.58% per
annum.  PNM preferred stock does not have a mandatory redemption
requirement but may be redeemed, at PNM’s option, at 102% of the stated value
plus accrued dividends.  The holders of the PNM preferred stock are
entitled to payment before the holders of common stock in the event of any
liquidation or dissolution or distribution of assets of PNM.  In
addition, PNM’s preferred stock is not entitled to a sinking fund and cannot be
converted into any other class of stock of PNM.





TNMP has
no preferred stock outstanding.  The number of authorized shares of
TNMP cumulative preferred stock is 1 million shares.





(6)
            Financing





Impacts
of Difficulties of Financial Institutions





Recent
and unprecedented disruption in the current credit markets has had a significant
adverse impact on a number of financial institutions, which has resulted in
certain institutions being restructured or formulating plans to be acquired by
other financial institutions.  This includes some financial
institutions that are lenders under the PNMR Facility, PNM Facility, and Term
Loan Agreement (which was terminated effective January 30, 2009), which are
described below.  Other than as described below, this has not impacted
these credit agreements to date and the Company does not anticipate it will have
a significant impact on the PNMR Facility and the PNM Facility, which expire in
2012.





LBB was a
lender under the PNMR Facility and the PNM Facility.  LBH, the parent
of LBB, has filed for bankruptcy protection.  Subsequent to the
bankruptcy filing by LBH, LBB declined to fund a borrowing request under the
PNMR Facility amounting to $5.3 million. The PNMR Facility and the PNM Facility
agreements contain procedures for substituting another financial institution to
take the place of any lender who defaults under the agreements.  A
replacement bank has taken the place of LBB under the PNM Facility, but as of
February 20, 2009, no arrangement has been made to replace LBB under the PNMR
Facility.  LBB’s commitment amounts to 5.33% of the PNMR
Facility.  PNMR does not believe the LBH bankruptcy will have a
significant impact on the liquidity provided by the PNMR Facility.





LBCS,
another subsidiary of LBH, has also declared bankruptcy and was a counterparty
to various energy transactions with First Choice and Optim
Energy.  First Choice had no receivables from LBCS, but as a result of
the bankruptcy, First Choice terminated these contracts effective September 24,
2008 and recognized a $3.9 million loss as settled purchase power
contracts.  The $3.9 million loss consisted of $2.2 million previously
recorded in earnings as unrealized losses on economic hedges and $1.7 million of
power purchases under normal contracts not previously recorded in earnings.
These power supply contracts have since been replaced with other counterparties,
which partially offset the $3.9 million loss.  Optim Energy did have a
receivable from LBCS, which has been written off.  PNMR’s equity share
of the write off was $0.6 million.  The bankruptcy of LBCS is not
expected to have a significant impact on future operations of the
Company.





Financing
Activities





In April
2006, PNMR entered into a short-term bridge loan agreement under which it
borrowed $480.0 million for temporary financing of Twin Oaks.  See
Note 2. Prior to December 31, 2006, $230.5 million of the bridge loan was repaid
and the remaining amount was repaid on April 17, 2007.





In July
2006, the City of Farmington, New Mexico authorized the issuance of new
tax-exempt bonds to finance a portion of the environmental project at
SJGS.  On June 26, 2007, the City of Farmington, New Mexico




B-48


PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008, 2007 and 2006





In
December 2006, PNMR issued 5,750,000 shares of its common stock at $30.79 per
share. PNMR received net proceeds from this offering, after deducting
underwriting discounts and commissions and expenses, of $170.8 million. PNMR
used the net proceeds from these stock sales to repay debt associated with the
acquisition of Twin Oaks.





Effective
June 15, 2007, TNMP redeemed $100.0 million of its 6.125% senior notes due 2008
at a redemption price of 100.5% of the principal amount redeemed, plus accrued
interest. To facilitate the redemption, PNMR made a cash contribution, recorded
as equity, of $101.2 million to TNP, which then made an equity contribution to
TNMP in the same amount.On
March 7, 2008, TNMP entered into a $150.0 million short-term bank loan agreement
with two lenders.  TNMP borrowed $150.0 million under this agreement
on April 9, 2008 and used the proceeds to redeem the remaining $148.9 million of
its 6.125% senior unsecured notes prior to the maturity date of June 1,
2008.  The $150.0 million borrowing under this agreement was repaid in
October 2008, through borrowing $150.0 million under the TNMP Facility described
under Short-term Debt below.




On May 5,
2008, PNM entered into a $300.0 million unsecured delayed draw term loan
facility (the “Term Loan Agreement”) with Merrill Lynch Bank USA, Morgan Stanley
Senior Funding, Inc. and Wachovia Bank, National Association. The Term Loan
Agreement allowed PNM to borrow up to $300.0 million.  Interest and
fees were based upon PNM’s then-current senior unsecured debt credit
ratings.  The Term Loan Agreement provided that if PNM received net
cash proceeds from the sale of certain debt securities or the sale of assets,
the amount of the commitments under the Term Loan Agreement would be
reduced.  As described below, on May 13, 2008, PNM completed the
offering of $350.0 million aggregate principal amount of senior unsecured
notes.  On May 28, 2008, PNM was notified that the lenders under the
Term Loan Agreement had reduced their commitments to $150.0
million.  As provided by the Term Loan Agreement, upon the closing of
the sale of PNM Gas described in Note 2, the Term Loan Agreement
terminated.  No borrowings were made under the Term Loan
Agreement.




On May 8,
2008, PNM entered into a $100.0 million unsecured letter of credit facility
pursuant to a reimbursement agreement (as amended, the “Reimbursement
Agreement”) with Deutsche Bank AG and Royal Bank of Canada.  The
Reimbursement Agreement allowed PNM to obtain, from time to time, standby
letters of credit up to the aggregate amount of $100.0 million at any time prior
to April 30, 2009.  The letter of credit and commitment fees varied
depending upon the then-current senior unsecured debt credit rating for
PNM.  Upon the sale of PNM Gas on January 30, 2009, PNM voluntarily
requested the termination of the Reimbursement Agreement.  No letters
of credit were issued under this arrangement.




On May
13, 2008, PNM issued $350.0 million aggregate principal amount of senior
unsecured notes. The notes pay interest semi-annually at a rate of 7.95% per
year, payable on May 15 and November 15 of each year, beginning November 15,
2008, and mature on May 15, 2018.




On May
15, 2008, TNMP entered into a credit agreement with eight lenders for the TNMP
Facility, which matures on May 13, 2009.  The TNMP Facility provides
TNMP with a revolving credit facility for up to $200.0 million.  In
connection with entering into the TNMP Facility, TNMP withdrew as a borrower
under the PNMR Facility and is no longer a party under the PNMR
Facility.


B-49
 PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008, 2007 and 2006




On
October 31, 2008, TNMP entered into a $100.0 million term loan credit agreement
with two lenders (the “TNMP Bridge Facility”) to provide an additional source of
funds to repay TNMP’s $167.7 million of senior unsecured notes that matured
January 15, 2009.  The TNMP Bridge Facility includes a covenant to
maintain a maximum consolidated debt-to-consolidated capitalization ratio. On
January 14, 2009, TNMP borrowed $100.0 million under the TNMP Bridge Facility,
which is due on March 30, 2009.  On January 15, 2009, TNMP repaid the
entire principal and interest due on the $167.7 million principal amount
outstanding of 6.25% senior unsecured notes utilizing the proceeds from the TNMP
Bridge Facility and inter-company borrowings from PNMR.




PNM had
$300.0 million aggregate principal amount of senior unsecured notes that matured
in September 2008.  PNM repaid these notes by utilizing cash on hand
and borrowing $240.0 million under the PNM Facility.




PNMR
previously issued 4,945,000 6.75% publicly held equity-linked
units.  Each of these equity-linked units consisted of a purchase
contract and a 5.0% undivided beneficial ownership interest in one of PNMR’s
senior notes with a stated amount of $1,000, which corresponded to a $50.00
stated amount of PNMR’s senior notes. The senior notes were scheduled to mature
in May 2010 (subject to the remarketing described below) and bore interest at a
rate of 4.8% per year.  The purchase contracts entitled their holders
to contract adjustment payments of 1.95% per year on the stated amount of
$50.00.  Each purchase contract contained a mandatory obligation for
the holder to purchase, and PNMR to sell, at a purchase price of $50.00 in cash,
shares of PNMR’s common stock on or before May 16,
2008.  Generally, the number of shares each holder of the
equity-linked units was obligated to purchase depended on the average closing
price per share of PNMR’s common stock over a 20-day trading period ending on
the third trading day immediately preceding May 16, 2008, with an adjusted
maximum price of $32.08 per share and minimum price of $26.29 per
share.  In accordance with the terms of the equity-linked units, the
senior note components were remarketed on May 16, 2008.  The
proceeds from the remarketed senior notes amounted to $247.3 million and were
utilized by the holders of the equity-linked units to satisfy their obligations
to purchase 9,403,412 shares of PNMR’s common stock for the same aggregate
amount on May 16, 2008.  In connection with the remarketing, PNMR sold
an additional $102.7 million of senior notes with the same terms for a total
offering of $350.0 million.  The senior notes pay interest
semi-annually at a rate of 9.25% per year, payable on May 15 and November 15 of
each year, beginning November 15, 2008, and mature on May 15, 2015.





PNMR also
had outstanding 4,000,000 privately held 6.625% equity-linked
units.  Each of these equity-linked units consisted of a purchase
contract and a 2.5% undivided beneficial ownership interest in one of PNMR’s
senior notes with a stated amount of $1,000, which corresponds to a $25.00
stated amount of PNMR’s senior notes.  The senior notes aggregating
$100.0 million were scheduled to mature in August 2010 (subject to the
remarketing described below) and bore interest at the annual rate of
5.1%.  The purchase contracts entitled the holder to quarterly
contract adjustment payments of 1.525% per year on the stated amount of
$25.00.  Each purchase contract contained a mandatory obligation for
the holder to purchase, and PNMR to sell, at a purchase price of $25.00 in cash,
shares of PNMR’s common stock (or PNMR preferred stock in a ratio of one
preferred share for each 10 shares of common stock) aggregating $100.0 million
on November 17, 2008.  Generally, the number of shares the holder was
obligated to purchase depended on the average closing price per share of PNMR’s
common stock over a 20-day trading period ending on the third trading day
immediately preceding November 16, 2008, with a maximum price of $25.12 per
share and minimum price of $20.93 per share.  In accordance with the
terms of the equity-linked units, PNMR attempted to remarket the senior note
components in November 2008, but was unable to complete the
remarketing.  As provided in the agreement under which the
equity-linked units were originally issued, the holder tendered the $100 million
of senior unsecured notes to PNMR to satisfy its obligations under the purchase
contracts. The holder chose to receive 477,800 shares of PNMR Series A
convertible preferred stock on November 17, 2009 in lieu of 4,778,000 shares of
PNMR common stock.  See Note 5.





On
January 5, 2009, PNMR commenced a tender offer whereby it offered to repurchase
up to $150.0 million of its 9.25% senior unsecured notes due
2015.  The tender offer requested the holders of the notes to submit
the amount of notes they would be willing to sell to PNMR and at the price they
would be willing to sell, within the range of 83% to 93% of face value,
including additional compensation of 3% of face value for those holders that
tendered their notes and did not withdraw them prior to the stated early
participation date. Prior to expiration of the




B-50


PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008, 2007 and 2006





Pursuant
to the terms of the PNM Resources Direct Plan, PNMR began offering new shares of
PNMR common stock through the plan beginning in June 2006.  In August
2006, PNMR entered into an equity distribution agreement to offer and sell up to
8.0 million shares of PNMR common stock from time to time.  The
agreement provides that PNMR will not sell more shares than needed for the
aggregate gross proceeds from such sales to reach $200.0
million.  PNMR has suspended the equity distribution agreement due to
market conditions.  Through December 31, 2008, PNMR had sold a
combined total of 2.4 million shares of its common stock through the PNMR Direct
Plan and the equity distribution agreement for net proceeds of $61.2 million, at
a weighted average price of $25.94.





In August
2006, PNMR filed a new automatically effective shelf registration statement with
the SEC for common stock and in April 2008, PNMR filed a new automatically
effective shelf registration statement for debt securities.  These new
registration statements expire three years from the date of filing and can be
amended at any time to include additional securities of PNMR.  As a
result, these new shelf registration statements have unlimited availability,
subject to certain restrictions and limitations.





In April
2008, PNM filed a new shelf registration statement for the issuance of $750.0
million of senior unsecured notes that was declared effective on April 29,
2008.  As of October 30, 2008, PNM had $600.0 million of remaining
unissued securities registered under this and a prior shelf registration
statement.





Borrowing
Arrangements Between PNMR and its Subsidiaries





PNMR has
one-year intercompany loan agreements with its subsidiaries. Individual
subsidiary loan agreements vary in amount from $20.0 million to $100.0 million
and have either reciprocal or non reciprocal terms.  Interest charged
to the subsidiaries is equivalent to interest paid on the PNMR
Facility.  As of December 31, 2008 and 2007, TNMP had outstanding
borrowings of $14.1 million and $3.4 million from PNMR under its intercompany
loan agreement.  On January 8, 2009, TNMP entered into an agreement
for an additional $50.0 million borrowing from PNMR that is subordinated to the
TNMP Bridge Facility described above.  On January 13, 2009, TNMP
borrowed $50.0 million from PNMR under the subordinated agreement.  At
February 20, 2008, TNMP has borrowed a total of $91.6 million from PNMR under
these agreements.





On
February 26, 2009, the Finance Committee of the PNMR Board authorized
PNMR  to provide support for the debt of TNMP by approving one or
more additional loans to TNMP as a contingency in the event TNMP is unable to
obtain external financing sufficient to pay amounts borrowed under the TNMP
Facility and the TNMP Bridge Facility when they come due.





Short-term
Debt





PNMR and
PNM have revolving credit facilities for borrowings up to $600.0 million under
the PNMR Facility and $400.0 million under the PNM Facility that primarily
expire in 2012 and local lines of credit amounting to $10.0 million and $8.5
million.  TNMP has a revolving credit facility for borrowings up to
$200.0 million under the TNMP Facility that expires May 13,
2009.  PNMR and PNM also have commercial paper programs under which
they may issue up to $400.0 million and $300.0 million of commercial paper. The
Company has suspended the commercial paper programs due to market conditions and
no commercial paper has been issued since March 11, 2008.  The
revolving credit facilities serve as support for the commercial paper
programs.  Operationally, this means the aggregate borrowings under
the commercial paper program and the revolving credit facility for each of PNMR
and PNM cannot exceed the maximum amount of the revolving credit facility for
that entity.





B-51
 PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008, 2007 and 2006


At
December 31, 2008, the weighted average interest rate was 2.17% for the PNMR
Facility, 1.80% for the PNM Facility, and 3.75% for the TNMP Facility.Short-term debt
outstanding consists of:








December
      31,
            
            
            December
      31,Short-term
      Debt
            
            2008
            
            
            2007(In
      thousands)PNMCommercial
      paper
            
            $
            -
            
            
            $
            -Revolving
      credit facility
            
            
            340,000
            
            
            
            321,000Delayed
      draw term loan facility
            
            
            -
            
            
            
            -Local
      lines of credit
            
            
            -
            
            
            
            -340,000
            
            
            
            321,000TNMPRevolving credit facility
            
            
            150,000
            
            
            
            -Bridge facility
            
            
            -
            
            
            
            -150,000
            
            
            
            -PNMRCommercial paper
            
            
            -
            
            
            
            -Revolving credit facility
            
            
            254,667
            
            
            
            343,500Local lines of credit
            
            
            -
            
            
            
            1,400$
            744,667
            
            
            $
            665,900





In
addition to the above borrowings, PNMR, PNM, and TNMP had letters of credit
outstanding of $119.8 million, $26.9 million and $1.5 million at December 31,
2008 that reduce the available capacity under their respective revolving credit
facilities.





At
February 20, 2009, PNMR, PNM, and TNMP had $301.5 million, $381.6 million, and
$48.5 million of availability under their respective revolving credit facilities
and local lines of credit, including reductions of availability due to
outstanding letters of credit.  TNMP also had availability of $8.4
million under its intercompany borrowing agreement with PNMR.  Total
availability at February 20, 2009, on a consolidated basis, was $731.6 million
for PNMR.  Such availability includes $23.5 million that represents
the unfunded portion of the PNMR Facility attributable to LBB.  At
February 20, 2009, PNMR, PNM, and TNMP had cash and cash equivalents of $5.9
million, $102.7 million, and none.





B-52
 PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008, 2007 and 2006


Long-Term
Debt





Information
concerning long-term debt outstanding is as follows:





December
      31,Long-term
      Debt
            
            2008
            
            
            2007(In
      thousands)PNM
      DebtFirst
      Mortgage Bonds, Pollution Control Revenue Bonds:5.70%
      due 2016
            
            $
            65,000
            
            
            $
            65,000Senior
      Unsecured Notes, Pollution Control Revenue Bonds:6.30%
      due 2016
            
            
            77,045
            
            
            
            77,0457.95%
      due 2018
            
            
            350,000
            
            
            
            -5.75%
      due 2022
            
            
            37,300
            
            
            
            37,3005.80%
      due 2022
            
            
            100,000
            
            
            
            100,0006.375%
      due 2022
            
            
            90,000
            
            
            
            90,0006.30%
      due 2026
            
            
            23,000
            
            
            
            23,0006.60%
      due 2029
            
            
            11,500
            
            
            
            11,5004.875%
      due 2033
            
            
            46,000
            
            
            
            46,0004.875%
      due 2033
            
            
            100,000
            
            
            
            100,0005.15%
      due 2037
            
            
            20,000
            
            
            
            20,0004.00%
      due 2038
            
            
            36,000
            
            
            
            36,000Senior
      Unsecured Notes:4.40% due 2008
            
            
            -
            
            
            
            300,0007.50% due 2018
            
            
            100,025
            
            
            
            100,025Other,
      including unamortized discounts
            
            
            (153
            )
            
            
            (200
            )1,055,717
            
            
            
            1,005,670Less
      current maturities
            
            
            36,000
            
            
            
            299,9691,019,717
            
            
            
            705,701TNMP
      DebtSenior
      Notes:6.125% due 2008
            
            
            -
            
            
            
            148,9356.25% due 2009
            
            
            167,690
            
            
            
            167,690Other,
      including unamortized discounts
            
            
            -
            
            
            
            (134
            )167,690
            
            
            
            316,491Less
      current maturities
            
            
            167,690
            
            
            
            148,882-
            
            
            
            167,609PNMR
      DebtSenior
      unsecured notes, 9.25% due 2015
            
            
            350,000
            
            
            
            -Equity-Linked
      Units:6.75%
      due 2010
            
            
            -
            
            
            
            247,2506.625%
      due 2010
            
            
            -
            
            
            
            100,000Other,
      including unamortized discounts
            
            
            11,298
            
            
            
            11,667361,298
            
            
            
            358,917Less
      current maturities
            
            
            2,004
            
            
            
            368359,294
            
            
            
            358,549Total
      Consolidated PNMR Debt
            
            
            1,584,705
            
            
            
            1,681,078Less
      current maturities
            
            
            205,694
            
            
            
            449,219$
            1,379,011
            
            
            $
            1,231,859





As
discussed above, the TNMP 6.25% senior notes were paid at maturity on January
15, 2009.  Although PNM’s 4.00% series of senior unsecured notes PCRB
mature in 2038, they are subject to mandatory repurchase and remarketing on July
1, 2009.  Accordingly, this series is included in current maturities
of long-term debt.


B-53
 PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008, 2007 and 2006


Interest
Rate Swaps





PNMR
entered into three fixed-to-floating interest rate swaps with an aggregate
notional principal amount of $150.0 million, which matured September 15,
2008.  Under these swaps, PNMR received a 4.40% fixed interest payment
on the notional principal amount on a semi-annual basis and paid a floating rate
equal to the six month LIBOR plus 58.15 basis points (0.5815%) on the notional
amount.  The initial floating rate was 1.91% and was reset to 6.09% on
September 15, 2007 and 3.28% on March 17, 2008.  The swaps were
accounted for as fair-value hedges with a liability position of $1.5 million as
of December 31, 2007, with a corresponding reduction of long-term
debt.





New
Mexico Energy Investments LLC





In 2002,
PNM entered into an agreement with FPL to develop a 200 MW wind generation
facility in New Mexico.  PNM began receiving commercial power from the
project in June 2003.  FPL owns and operates the New Mexico Wind
Energy Center, which consists of 136 wind-powered turbines on a site in eastern
New Mexico.  PNM has a PPA to purchase all the power generated by the
New Mexico Wind Energy Center for 25 years.





On
December 20, 2006, PNMR entered into purchase and sale agreement with ESI
Northeast Energy LP, Inc., an affiliate of FPL, and acquired an interest in the
New Mexico Wind Energy Center by the purchase of a 1% membership interest in New
Mexico Energy Investments, LLC for $21.2 million.  At closing, PNMR
paid $6.2 million in cash and issued a promissory note for $15.0 million at an
annual interest rate of 6%. PNMR will make an annual payment of $2.7 million for
principal and interest until the final maturity date of the promissory note on
December 31, 2013.  PNMR will receive state and federal tax benefits
from its ownership interest.  PNMR’s ownership interest terminates on
December 31, 2013.





(7)
            Lease
      Commitments





PNMR
leases office buildings and other equipment under operating leases. PNM leases
interests in Units 1 and 2 of PVNGS, an interest in the EIP transmission line,
office buildings, vehicles and other equipment under operating
leases.  TNMP leases radio tower antenna space, office buildings,
vehicles and other equipment under operating leases.





PNM has a
PPA for the entire output of Delta, a gas-fired generating plant in Albuquerque,
New Mexico, which is classified as an operating lease with imputed annual lease
payments of $6.0 million.  See Note 9 for additional information about
the Delta operating lease.  PNM also had a PPA for 40 MW of capacity
from Pyramid Unit 4, which was classified as an operating lease and was sold in
2008.  See Note 8.





Operating
lease expense was:





PNMR
            
            
            PNM
            
            
            TNMP(In
      thousands)2008
            
            $
            83,255
            
            
            $
            82,101
            
            
            $
            2,1212007
            
            $
            86,532
            
            
            $
            80,491
            
            
            $
            3,2332006
            
            $
            85,671
            
            
            $
            77,890
            
            
            $
            1,408





The
amounts included in the above table reflect the total amount of the lease
payments PNM makes under the PVNGS and EIP leases.  As discussed under
Investments in Note 1, the PVNGS Capital Trust, which is consolidated by PNM,
acquired the lessor notes that were issued by the PVNGS lessors and PNM acquired
the remaining lessor note issued by the remaining EIP lessor.  Of the
total annual payments of $69.1 million made by PNM under the PVNGS and EIP
leases, $50.0 million in 2008, $50.8 million in 2007, and $51.8 million in 2006
was returned in cash to PNM in the form of principal and interest payments on
the lessor notes.  A portion of PVNGS Unit 2 is leased by PNM from
another subsidiary of PNMR.  The above includes lease expense of $9.6
million in 2008 and $4.8 million in 2007 paid to that subsidiary of which $7.4
million and $3.7 million was returned to PNM




B-54


PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008, 2007 and 2006





Future
minimum operating lease payments at December 31, 2008 shown below have been
reduced by amounts that will be returned to PNM on the lessor notes, which vary
but are approximately $52 million annually thru 2011 reducing thereafter to
approximately $30 million annually in 2015.  Of PNM’s future lease
payments, $9.6 million annually through 2016 are made to another subsidiary of
PNMR of which amounts varying between $6.4 million and $7.3 are returned to PNM
as payments on the lessor notes. :





PNMR
            
            
            PNM
            
            
            TNMP(In
      thousands)2009
            
            $
            29,644
            
            
            $
            27,061
            
            
            $
            1,6392010
            
            
            28,375
            
            
            
            25,930
            
            
            
            1,6332011
            
            
            28,989
            
            
            
            26,693
            
            
            
            1,6332012
            
            
            41,805
            
            
            
            39,618
            
            
            
            1,6332013
            
            
            45,819
            
            
            
            43,771
            
            
            
            1,631Later
      years
            
            
            100,956
            
            
            
            103,805
            
            
            
            -275,588
            
            
            
            266,878
            
            
            
            8,169Future
      payments under non-cancelable subleases
            
            
            2,284
            
            
            
            -
            
            
            
            -Total
      minimum lease payments
            
            $
            273,304
            
            
            $
            266,878
            
            
            $
            8,169








The PVNGS
leases, which expire in 2015 and 2016, contain options to renew the leases or to
purchase the property for fair market value at the end of the lease
terms.  PNM is analyzing this matter to determine which option or
options to pursue. A portion of PVNGS Unit 2 is leased by PNM from another
subsidiary of PNMR.  Covenants in PNM's PVNGS Units 1 and 2 lease
agreements limit PNM's ability, without consent of the owner participants in the
lease transactions, (i) to enter into any merger or consolidation, or (ii)
except in connection with normal dividend policy, to convey, transfer, lease or
dividend more than 5% of its assets in any single transaction or series of
related transactions.  PNM is exposed to losses under the PVNGS lease
arrangements upon the occurrence of certain events that PNM does not consider to
be reasonably likely to occur. Under certain circumstances (for example, the NRC
issuing specified violation orders with respect to PVNGS or the occurrence of
specified nuclear events), PNM would be required to make specified payments to
the equity participants, and take title to the leased interests, which, if
appropriate, may be required to be written down in value. If such an event had
occurred as of December 31, 2008, PNM could have been required to pay the
equity participants up to approximately $192.7 million, of which up to
$30.2 million would be payable to another subsidiary of PNMR.  PNM
would have recorded the acquired assets at the lower of their fair value or
aggregate of the amount paid and PNM’s carrying value of its investment in PVNGS
lessor notes.





(8)
            Fair
      Value of Derivative and Other Financial
  Instruments





Energy
Related Derivative Contracts





Overview





Under
derivative accounting and related rules for energy contracts, the Company
accounts for its various derivative instruments for the purchase and sale of
energy based on the Company’s intent.   Energy contracts that do
not qualify for the normal sales and purchases exception are recorded at fair
value.   See Note 6 for additional information regarding interest
rate swaps, which are fair value hedges.





For
derivative transactions meeting the definition of a cash flow or fair value
hedge, the Company documents the relationships between the hedging instruments
and the items being hedged.  This documentation includes the strategy
that supports executing the specific transaction and the methods utilized to
assess the effectiveness of the hedges.  Changes in the fair value of
contracts qualifying for cash flow hedge accounting are included in AOCI to




B-55


PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008, 2007 and 2006





The
contracts recorded at fair value that do not qualify or are not designated for
hedge accounting are classified as either trading transactions or economic
hedges.  Trading transactions are defined as derivative instruments
that are either speculative and expose the Company to market risk or
transactions that lock in margin with no forward market risk and are not
economic hedges.  Changes in the fair value of trading transactions
are reflected on a net basis in operating revenues.  Economic hedges
are defined as derivative instruments, including long-term power agreements,
used to hedge generation assets, purchased power costs, and customer load
requirements.  Changes in the fair value of economic hedges are
reflected in results of operations, with changes related to sales contracts
included in operating revenues and changes related to purchase contracts
included in cost of energy.





Fair
value is based on current market quotes as available and is supplemented by
modeling techniques and assumptions made by the Company to the extent quoted
market prices or volatilities are not available.  External pricing
input availability varies based on commodity location, market liquidity, and
term of the agreement.  The Company regularly assesses the validity
and availability of pricing data for its derivative
transactions.  Although management uses its best judgment in
estimating the fair value of these instruments, there are inherent limitations
in any estimation technique.





Effective
January 1, 2008, the Company adopted SFAS 157, SFAS 159, and FSP FIN 39-1.
SFAS 157 defines fair value, establishes a framework for measuring fair value
under GAAP, and enhances disclosures about fair value measurements. Fair value
is defined under SFAS 157 as the exchange price that would be received for an
asset or paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between
market participants on the measurement date.  FSP 157-2 delayed the
effective date of SFAS 157 for certain nonfinancial assets and nonfinancial
liabilities measured on a nonrecurring basis, primarily goodwill and other
intangible assets, and the Company has not elected to early adopt SFAS 157 for
these items.  SFAS 159 allows an entity the irrevocable option to
elect fair value for the initial and subsequent measurement for certain
financial assets and liabilities on a contract-by-contract basis. FSP FIN 39-1
permits a reporting entity to offset fair value amounts recognized for
derivative instruments executed with the same counterparty under a master
netting arrangement and to offset fair value amounts recognized for the right to
reclaim cash collateral (a receivable) or the obligation to return cash
collateral (a payable) against fair value amounts recognized for derivative
instruments in accordance with FSP FIN 39-1.  On October 10, 2008, the
FASB issued FSP FAS 157-3 to clarify the application of SFAS 157 when a market
for a financial instrument is not active.  FSP FAS 157-3 has no impact
on the Company’s current methodologies for assessing fair value.





As stated
in SFAS 157, valuations of derivative assets and liabilities must take into
account nonperformance risk including the effect of the Company’s own credit
standing.  Nonperformance risk refers to the risk that the obligation
will not be fulfilled and affects the value at which the liability is
transferred.  Effective January 1, 2008, the Company updated its
methodology to include the impact of the nonperformance risk and its own credit
standing. The Company did not elect to irrevocably fair value any items eligible
under SFAS 159 and did not elect to offset fair values of its derivative
instruments under FSP FIN 39-1.





Prior to
January 1, 2008, the Company deferred gains and losses at inception of certain
derivative contracts whose fair value was not evidenced by observable market
data in accordance with EITF 02-3. For those gains and losses not evidenced by
observable market data, the transaction price was used as the fair value of the
derivative contract. Any difference between the transaction price and the model
fair value was considered an unrecognized gain or loss at inception of the
contract. These unrecognized gains and losses were recorded in income as the




B-56


PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008, 2007 and 2006





At
December 31, 2008, amounts recognized for the right to reclaim cash collateral
are $6.4 million for PNMR and zero for PNM.  PNMR and PNM had
obligations to return cash collateral of $2.9 million and none at December 31,
2008.





The
following tables do not include activity related to PNM Gas.  See Note
23.





PNMR





PNMR’s
commodity derivative instruments are summarized as follows:





December
      31,
            
            
            December
      31,2008
            
            
            2007
            
            
            2008
            
            
            2007Type
      of Derivative
            
            Mark-to-Market
      Instruments
            
            
            Hedge
      Instruments(In
      thousands)Current
      AssetsEnergy
      contracts
            
            $
            9,368
            
            
            $
            14,486
            
            
            $
            25,528
            
            
            $
            864Swaps
      and futures
            
            
            15,383
            
            
            
            25,653
            
            
            
            367
            
            
            
            524Options
            
            
            417
            
            
            
            7,372
            
            
            
            187
            
            
            
            358Total
      current assets
            
            
            25,168
            
            
            
            47,511
            
            
            
            26,082
            
            
            
            1,746Deferred
      ChargesEnergy
      contracts
            
            
            7,550
            
            
            
            14,133
            
            
            
            15,683
            
            
            
            -Swaps
      and futures
            
            
            2,104
            
            
            
            26,898
            
            
            
            283
            
            
            
            -Options
            
            
            -
            
            
            
            4,663
            
            
            
            -
            
            
            
            -Total
      deferred charges
            
            
            9,654
            
            
            
            45,694
            
            
            
            15,966
            
            
            
            -Total
      Assets
            
            
            34,822
            
            
            
            93,205
            
            
            
            42,048
            
            
            
            1,746Current
      LiabilitiesEnergy
      contracts
            
            
            (9,378
            )
            
            
            (19,842
            )
            
            
            -
            
            
            
            -Swaps
      and futures
            
            
            (20,292
            )
            
            
            (25,308
            )
            
            
            (2,134
            )
            
            
            (1,058
            )Options
            
            
            (1,102
            )
            
            
            (7,594
            )
            
            
            (1,045
            )
            
            
            (30
            )Total
      current liabilities
            
            
            (30,772
            )
            
            
            (52,744
            )
            
            
            (3,179
            )
            
            
            (1,088
            )Long-term
      LiabilitiesEnergy
      contracts
            
            
            (3,852
            )
            
            
            (42,009
            )
            
            
            -
            
            
            
            -Swaps
      and futures
            
            
            (3,064
            )
            
            
            (4,465
            )
            
            
            (18
            )
            
            
            (32
            )Options
            
            
            -
            
            
            
            (8,700
            )
            
            
            -
            
            
            
            -Total
      long-term liabilities
            
            
            (6,916
            )
            
            
            (55,174
            )
            
            
            (18
            )
            
            
            (32
            )Total
      Liabilities
            
            
            (37,688
            )
            
            
            (107,918
            )
            
            
            (3,197
            )
            
            
            (1,120
            )Net
      Total Assets and Liabilities
            
            $
            (2,866
            )
            
            $
            (14,713
            )
            
            $
            38,851
            
            
            $
            626





First
      Choice Trading Activities





In 2007,
First Choice entered into a series of forward trades that arbitraged basis
differentials among certain ERCOT delivery zones.  During the three
months ended March 31, 2008, these trades were negatively affected by extreme
transmission congestion within the ERCOT market. This congestion resulted in
historically high basis differences between the various delivery zones. As a
result, in the first quarter of 2008, First Choice recorded a total




B-57


PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008, 2007 and 2006





PNM





PNM’s
commodity derivative instruments are summarized as follows:





December
      31,
            
            
            December
      31,2008
            
            
            2007
            
            
            2008
            
            
            2007Type
      of Derivative
            
            Mark-to-Market
      Instruments
            
            
            Hedge
      Instruments(In
      thousands)Current
      AssetsEnergy
      contracts
            
            $
            730
            
            
            $
            2,587
            
            
            $
            25,529
            
            
            $
            864Swaps
      and futures
            
            
            2,593
            
            
            
            6,650
            
            
            
            -
            
            
            
            422Options
            
            
            -
            
            
            
            4,336
            
            
            
            -
            
            
            
            -Total
      current assets
            
            
            3,323
            
            
            
            13,573
            
            
            
            25,529
            
            
            
            1,286Deferred
      ChargesEnergy
      contracts
            
            
            2,060
            
            
            
            9,443
            
            
            
            15,684
            
            
            
            -Swaps
      and futures
            
            
            -
            
            
            
            23,253
            
            
            
            -
            
            
            
            -Options
            
            
            -
            
            
            
            4,663
            
            
            
            -
            
            
            
            -Total
      deferred charges
            
            
            2,060
            
            
            
            37,359
            
            
            
            15,684
            
            
            
            -Total
      Assets
            
            
            5,383
            
            
            
            50,932
            
            
            
            41,213
            
            
            
            1,286Current
      LiabilitiesEnergy
      contracts
            
            
            (1,647
            )
            
            
            (6,872
            )
            
            
            -
            
            
            
            -Swaps
      and futures
            
            
            (6,224
            )
            
            
            (6,037
            )
            
            
            (13
            )
            
            
            (868
            )Options
            
            
            -
            
            
            
            (4,119
            )
            
            
            -
            
            
            
            -Total
      current liabilities
            
            
            (7,871
            )
            
            
            (17,028
            )
            
            
            (13
            )
            
            
            (868
            )Long-term
      LiabilitiesEnergy
      contracts
            
            
            -
            
            
            
            (38,172
            )
            
            
            -
            
            
            
            -Swaps
      and futures
            
            
            (551
            )
            
            
            (693
            )
            
            
            (18
            )
            
            
            (32
            )Options
            
            
            -
            
            
            
            (8,700
            )
            
            
            -
            
            
            
            -Total
      long-term liabilities
            
            
            (551
            )
            
            
            (47,565
            )
            
            
            (18
            )
            
            
            (32
            )Total
      Liabilities
            
            
            (8,422
            )
            
            
            (64,593
            )
            
            
            (31
            )
            
            
            (900
            )Net
      Total Assets and Total Liabilities
            
            $
            (3,039
            )
            
            $
            (13,661
            )
            
            $
            41,182
            
            
            $
            386





Sale
of Wholesale Contracts





On
January 18, 2008, PNM entered into an agreement to sell certain wholesale power,
natural gas and transmission contracts. These contracts represented a
significant portion of the wholesale activity portfolio of PNM Electric, and
include several long-term sales and purchase power
agreements.  Included in the sales agreement were the Tri-State
Pyramid Unit 4 operating lease and certain transmission agreements, which were
not considered derivative instruments under SFAS 133.  The derivative
contracts included in the sale were fair valued and reflected in the above table
at December 31, 2007 as current assets of $6.3 million, deferred charges of
$35.8 million, current




B-58


PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008, 2007 and 2006





Sale
of Power from PVNGS Unit 3





In April
2008, PNM entered into three separate contracts for the sale of capacity and
energy related to its entire ownership interest in PVNGS Unit 3, which is 135
MW.  Under two of the contracts, PNM will sell 90 MW of firm capacity and
energy.  Under the remaining contract, PNM will sell 45 MW of unit
contingent capacity and energy. The term of the contracts is May 1, 2008 through
December 31, 2010.  Under the two firm contracts, the two buyers made
prepayments of $40.6 million and $30.0 million.  These amounts were
recorded as deferred revenue and are being amortized over the life of the
contracts.  The amount to be amortized in the next 12 months is
included in other current liabilities in the Consolidated Balance Sheet and the
remainder is included in other deferred credits.  The prepayments
received under the firm contracts, as well as required subsequent monthly
payments on them, are shown as a financing activity in the Consolidated
Statement of Cash Flows as required by GAAP.  The firm contracts are
considered energy derivatives and a loss of $4.8 million was recognized at
inception.  The firm contracts are accounted for as cash flow hedges
and changes in fair value are included in AOCI.  The contingent
contract is accounted for as a normal sale.





Non-Derivative
Financial Instruments





The
carrying amounts reflected on the Consolidated Balance Sheets approximate fair
value for cash, temporary investments, receivables, and payables due to the
short period of maturity.  The carrying amount and fair value of other
financial instruments (including current maturities) are:








December
      31, 2008
            
            
            December
      31, 2007Carrying
            
            
            
            
            
            CarryingAmount
            
            
            Fair
      Value
            
            
            Amount
            
            
            Fair
      Value(In
      thousands)PNMRLong-term
      debt
            
            $
            1,584,705
            
            
            $
            1,312,603
            
            
            $
            1,681,078
            
            
            $
            1,681,355Investment
      in PVNGS lessor notes
            
            $
            185,637
            
            
            $
            190,077
            
            
            $
            216,936
            
            
            $
            238,766PNMLong-term
      debt
            
            $
            1,055,717
            
            
            $
            834,157
            
            
            $
            1,005,670
            
            
            $
            1,000,260Investment
      in PVNGS lessor notes
            
            $
            221,422
            
            
            $
            225,987
            
            
            $
            256,292
            
            
            $
            282,083TNMPLong-term
      debt
            
            $
            167,690
            
            
            $
            167,690
            
            
            $
            316,491
            
            
            $
            319,714








Available-for-sale
securities consist solely of PNM assets held in trust for its share of
decommissioning costs of PVNGS and PNM’s executive retirement
program.  The trusts hold equity and fixed income
securities.  These amounts are included in other investments on the
Consolidated Balance Sheets.  (See Note 1 for additional information
related to the fair value of investments.)  The carrying value, gross
unrealized gains and losses and estimated fair value of investments in
available-for-sale securities are as follows:


B-59
 PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008, 2007 and 2006





Unrealized
      Gains
            
            
            Unrealized
      (Losses)
            
            
            Fair
      Value(In
      thousands)December
      31, 2008:Equity
      securities
            
            $
            1,181
            
            
            $
            -
            
            
            $
            50,941Municipal
      bonds
            
            
            737
            
            
            
            -
            
            
            
            31,900U.S.
      Government securities
            
            
            90
            
            
            
            -
            
            
            
            14,262Corporate
      bonds
            
            
            115
            
            
            
            -
            
            
            
            6,034Cash
      investments
            
            
            -
            
            
            
            -
            
            
            
            9,345$
            2,123
            
            
            $
            -
            
            
            $
            112,482December
      31, 2007:Equity
      securities
            
            $
            20,182
            
            
            $
            -
            
            
            $
            78,014Municipal
      bonds
            
            
            693
            
            
            
            (57
            )
            
            
            32,992U.S.
      Government securities
            
            
            458
            
            
            
            -
            
            
            
            13,409Corporate
      bonds
            
            
            39
            
            
            
            -
            
            
            
            5,299Cash
      investments
            
            
            -
            
            
            
            -
            
            
            
            12,390$
            21,372
            
            
            $
            (57
            )
            
            $
            142,104





The
proceeds and gross realized gains and losses on the disposition of
available-for-sale investments for PNMR and PNM are shown in the following
table.  Realized gains and losses are determined by specific
identification of costs of securities sold.





Year
      Ended December 31,2008
            
            
            2007
            
            
            2006(In
      thousands)Proceeds
      from sales
            
            $
            183,616
            
            
            $
            165,330
            
            
            $
            98,660Gross
      realized gains
            
            $
            11,279
            
            
            $
            19,483
            
            
            $
            10,970Gross
      realized (losses)
            
            $
            (14,206
            )
            
            $
            (7,016
            )
            
            $
            (5,256
            )





At
December 31, 2008, the available-for-sale and held to maturity securities had
the following maturities:





Fair
      ValueAvailable
      for Sale
            
            
            Held to MaturityPNMR and PNM
            
            
            PNMR
            
            
            PNM(In thousands)Within
      1 year
            
            $
            1,444
            
            
            $
            -
            
            
            $
            -After
      1 year through 5 years
            
            
            11,761
            
            
            
            54,559
            
            
            
            54,559After
      5 years through 10 years
            
            
            8,752
            
            
            
            135,518
            
            
            
            171,428Over
      10 years
            
            
            30,239
            
            
            
            -
            
            
            
            -Equity
      securities
            
            
            50,941
            
            
            
            -
            
            
            
            -Cash
      investments
            
            
            9,345
            
            
            
            -
            
            
            
            -$
            112,482
            
            
            $
            190,077
            
            
            $
            225,987





Fair
      Value Disclosures





Effective
January 1, 2008, the Company determines the fair market values of its
instruments based on the fair value hierarchy established in SFAS 157, which
requires an entity to maximize the use of observable inputs and minimize the use
of unobservable inputs when measuring fair value. The standard describes three
levels of inputs that may be used to measure fair value.  Level 1
inputs are quoted prices (unadjusted) in active markets for identical




B-60


PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008, 2007 and 2006





Assets
and Liabilities Measured at Fair Value on a Recurring Basis


Fair
Value Measurements





Total(1)
            
            
            Quoted
      Prices in Active Market for Identical Assets
              (Level
      1)
            
            
            Significant
      Other Observable Inputs
              (Level
      2)
            
            
            Significant
      Unobservable Inputs
              (Level
      3)(In
      thousands)PNMRAssetsCommodity
      derivatives
            
            $
            76,870
            
            
            $
            9,390
            
            
            $
            66,953
            
            
            $
            13NDT
            
            
            111,671
            
            
            
            69,150
            
            
            
            42,521
            
            
            
            -Rabbi
      Trust
            
            
            811
            
            
            
            811
            
            
            
            -
            
            
            
            -Total
      Assets
            
            
            189,352
            
            
            
            79,351
            
            
            
            109,474
            
            
            
            13LiabilitiesCommodity
      derivatives
            
            
            (40,885
            )
            
            
            (12,052
            )
            
            
            (27,897
            )
            
            
            (422
            )Net
      Total Assets and Total Liabilities
            
            $
            148,467
            
            
            $
            67,299
            
            
            $
            81,577
            
            
            $
            (409
            )





PNMAssetsCommodity
      derivatives
            
            $
            46,596
            
            
            $
            -
            
            
            $
            45,519
            
            
            $
            13NDT
            
            
            111,671
            
            
            
            69,150
            
            
            
            42,521
            
            
            
            -Rabbi
      Trust
            
            
            811
            
            
            
            811
            
            
            
            -
            
            
            
            -Total
      Assets
            
            
            159,078
            
            
            
            69,961
            
            
            
            88,040
            
            
            
            13LiabilitiesCommodity
      derivatives
            
            
            (8,453
            )
            
            
            (510
            )
            
            
            (6,457
            )
            
            
            (422
            )Net
      Total Assets and Total Liabilities
            
            $
            150,625
            
            
            $
            69,451
            
            
            $
            81,583
            
            
            $
            (409
            )





(1)
            The
      Level 1, 2 and 3 columns in the above table are presented based on the
      nature of each instrument.  The total column is presented based
      on the balance sheet classification of the instruments and reflect unit of
      account reclassifications between commodity derivative assets and
      commodity derivative liabilities of $0.5 million for PNMR and $1.1 million
      for PNM.





For the
year ended December 31, 2008, changes in Level 3 transactions were primarily
related to the June 2008 $15.7 million sale of PNM’s wholesale
contracts.  A reconciliation of the changes in Level 3 fair value
measurements is as follows:


B-61
 PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008, 2007 and 2006





Recurring
Fair Value Measurements Using Significant Unobservable Inputs


(Level
3)





Year
      ended December 31, 2008PNMR
            
            
            PNM(In
      thousands)Level
      3 Fair Value Assets and LiabilitiesBalance
      at December 31, 2007
            
            $
            2,061
            
            
            $
            2,679Adoption
      of SFAS 157
            
            
            16,407
            
            
            
            16,407Balance
      at beginning of period
            
            
            18,468
            
            
            
            19,086Total
      gains (losses) included in earnings
            
            
            (8,555
            )
            
            
            (7,947
            )Total
      gains (losses) included in other comprehensive income
            
            
            (19
            )
            
            
            -Purchases,
      issuances, and settlements(1)
            
            
            (11,383
            )
            
            
            (12,628
            )Transfers
      into Level 3
            
            
            1,080
            
            
            
            1,080Balance
      at December 31, 2008
            
            $
            (409
            )
            
            $
            (409
            )Total
      gains (losses) included in earnings attributable to the change in
      unrealized gains or losses relating to assets still held at the end of the
      period
            
            $
            (409
            )
            
            $
            (409
            )





(1)
            Includes
      fair value reversal of contracts settled, unearned and prepaid option
      premiums received and paid during the period for contracts still held at
      end of period and sale of PNM Electric wholesale
  contracts.





Gains and
losses (realized and unrealized) for Level 3 fair value measurements included in
earnings are reported in operating revenues and cost of energy as
follows:





Year
      ended December 31, 2008PNMR
            
            Operating
              Revenues
            
            
            Cost
      of
              Energy
            
            
            TotalTotal
      gains (losses) included in earnings
            
            $
            11,511
            
            
            $
            (20,066
            )
            
            $
            (8,555
            )Change
      in unrealized gains or losses relating to assets still held at reporting
      date
            
            $
            13
            
            
            $
            (422
            )
            
            $
            (409
            )PNMTotal
      gains (losses) included in earnings
            
            $
            10,893
            
            
            $
            (18,840
            )
            
            $
            (7,947
            )Change
      in unrealized gains or losses relating to assets still held at reporting
      date
            
            $
            13
            
            
            $
            (422
            )
            
            $
            (409
            )





(9)
            Variable
      Interest Entities





Under the
model for consolidation promulgated by FIN 46R, a PPA may qualify as a variable
interest if its terms expose the purchaser to variability in supply or operating
costs and the contract is for a significant portion of the entity’s generating
capacity.  PNM evaluated its PPAs under the provisions of FIN 46R and
determined that one purchase contract entered into prior to December 31, 2003
qualifies as a variable interest.  PNM has been unable to obtain the
necessary information needed to determine if PNM was the primary beneficiary and
if consolidation was needed despite ongoing efforts, including formal written
requests to the operator of the entity supplying power under the
PPA.  The operator cited legal and competitive reasons for refusing to
provide the information.


B-62
 PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008, 2007 and 2006


This
variable interest PPA is a contract expiring in June 2020 to purchase 132 MW of
capacity and energy, which is the full output of the Delta generating
plant.   The contract is accounted for as an operating lease by
PNM.  See Note 7 for more information about the Delta operating
lease.  The contract contains a fixed capacity charge, a fixed O&M
charge, and a variable energy charge that subject PNM to the changes in the
costs to produce energy and operate the plant.  The capacity and
O&M charges were $9.0 million in 2008, $8.0 million in 2007, and $8.2
million in 2006.  The energy charges were $0.8 million in 2008, $1.0
million in 2007, and $1.4 million in 2006.  These charges represent
all of PNM’s obligations under this PPA, PNM has no other financial exposure
related to the Delta operating lease.





On April
18, 2007, PNM entered into a PPA to purchase all of the electric capacity and
energy from Valencia, a natural gas-fired power plant near Belen, New
Mexico.  Valencia became operational on May 30, 2008.  A
third-party built, owns and operates the facility while PNM is the sole
purchaser of the electricity generated. The total construction cost for the
facility was $90.0 million. The term of the PPA is for 20 years beginning June
1, 2008, with the full output of the plant estimated to be 148
MW.  During the term of the PPA, PNM has the option to purchase and
own up to 50% of the plant or the variable interest entity. PNM estimates that
the plant will typically operate during peak periods of energy demand in summer
(less than 18% of the time on an annual basis).  PNM is obligated to
pay fixed O&M and capacity charges in addition to variable O&M charges
under this PPA.  For the year ended December 31, 2008, PNM paid $7.5
million for fixed charges and $2.6 million for variable charges.  PNM
does not have any other financial obligations related to Valencia and creditors
of Valencia do not have any recourse against PNM’s assets.





PNM has
evaluated the accounting treatment of this arrangement and concluded that the
third party entity that owns Valencia is a variable interest entity and that PNM
is the primary beneficiary of the entity under FIN 46R since PNM will absorb the
majority of the variability in the cash flows of the plant.  As the
primary beneficiary, PNM has consolidated the entity in its financial statements
beginning on the commercial operations date.  Accordingly, the assets,
liabilities, operating expenses, and cash flows of Valencia are included in the
consolidated financial statements of PNM although PNM has no legal ownership
interest or voting control of the variable interest entity.  The
owner’s equity and net income of Valencia are considered attributable to
minority interest.  PNM did not consolidate the variable interest
entity prior to May 30, 2008 since PNM had no financial risk.





Summarized
financial information for Valencia since May 30, 2008 is as
follows:





Results
of Operations





May
      30, 2008 toDecember 31, 2008(In
      thousands)Operating
      revenues
            
            $
            10,400Operating
      expenses
            
            
            (2,996
            )Interest
      expense
            
            
            (225
            )Income
      attributable to minority interest
            
            $
            7,179





Financial
Position





December 31, 2008(In
      thousands)Current
      assets
            
            $
            9,925Net
      property, plant and equipment
            
            
            89,011Total
      assets
            
            
            98,936Current
      liabilities
            
            
            430Owners’
      equity – minority interest
            
            $
            98,506


B-63
 PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008, 2007 and 2006


(10)
            Earnings
      Per Share





In
accordance with SFAS No. 128, dual presentation of basic and diluted earnings
(loss) per share has been presented in the Consolidated Statements of Earnings
(Loss) of PNMR.  Information regarding the computation of earnings
(loss) per share is as follows:





Year
      Ended December 31,2008
            
            
            2007
            
            
            2006(In
      thousands, except per share amounts)Earnings
      (Loss):Earnings (loss) from continuing operations
            
            $
            (305,272
            )
            
            $
            59,358
            
            
            $
            107,960Earnings (loss) from discontinued operations
            
            
            34,628
            
            
            
            15,516
            
            
            
            12,858Net
      Earnings (Loss)
            
            $
            (270,644
            )
            
            $
            74,874
            
            
            $
            120,818Average
      Number of Common Shares:Outstanding during year
            
            
            82,879
            
            
            
            76,719
            
            
            
            69,829Equivalents from convertible preferred stock (Note 5)
            
            
            589
            
            
            
            -
            
            
            
            -Average
      Shares - Basic
            
            
            83,468
            
            
            
            76,719
            
            
            
            69,829Dilutive
      Effect of Common Stock Equivalents (a):Stock options and restricted stock
            
            
            -
            
            
            
            537
            
            
            
            567Equity-linked units
            
            
            -
            
            
            
            672
            
            
            
            240Average
      Shares – Diluted
            
            
            83,468
            
            
            
            77,928
            
            
            
            70,636Per
      Share of Common Stock – Basic:Earnings (loss) from continuing operations
            
            $
            (3.66
            )
            
            $
            0.77
            
            
            $
            1.55Earnings (loss) from discontinued operations
            
            
            0.42
            
            
            
            0.21
            
            
            
            0.18Net
      Earnings (Loss)
            
            $
            (3.24
            )
            
            $
            0.98
            
            
            $
            1.73Per
      Share of Common Stock – Diluted:Earnings (loss) from continuing operations
            
            $
            (3.66
            )
            
            $
            0.76
            
            
            $
            1.53Earnings(loss)  from discontinued operations
            
            
            0.42
            
            
            
            0.20
            
            
            
            0.18Net
      Earnings (Loss)
            
            $
            (3.24
            )
            
            $
            0.96
            
            
            $
            1.71





(a)
            Due
      to losses in the year ended December 31, 2008, no potentially dilutive
      securities are reflected in the average number of common shares used to
      compute earnings (loss) per share since any impact would be
      anti-dilutive.  At December 31, 2008, PNMR’s potentially
      dilutive securities consists of all options and restricted stock (see Note
      13). The years ended December 31, 2007 and 2006 exclude the effect of
      average anti-dilutive common stock equivalents related to out-of-the-money
      options of 1,297,226 shares, and 653,398
shares.


B-64
 PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008, 2007 and 2006


(11)
              Income
      Taxes





PNMR





PNMR’s
income taxes (benefit) from continuing operations consist of the following
components:





Year
      Ended December 31,2008
            
            
            2007
            
            
            2006(In
      thousands)Current
      federal income tax
            
            $
            (31,625
            )
            
            $
            (21,438
            )
            
            $
            3,167Current
      state income tax
            
            
            2,290
            
            
            
            (10,112
            )
            
            
            (1,179
            )Deferred
      federal income tax
            
            
            (22,722
            )
            
            
            28,583
            
            
            
            50,942Deferred
      state income tax
            
            
            (35,855
            )
            
            
            9,517
            
            
            
            6,068Amortization
      of accumulated investment tax credits
            
            
            (2,904
            )
            
            
            (3,324
            )
            
            
            (3,468
            )Total income taxes (benefit)
            
            $
            (90,816
            )
            
            $
            3,226
            
            
            $
            55,530





PNMR’s
provision for income taxes from continuing operations differed from the federal
income tax computed at the statutory rate for each of the years
shown.  The differences are attributable to the following
factors:





Year
      Ended December 31,2008
            
            
            2007
            
            
            2006(In
      thousands)Federal
      income tax at statutory rates
            
            $
            (138,446
            )
            
            $
            22,089
            
            
            $
            57,406Impairment
      of goodwill
            
            
            61,024
            
            
            
            -
            
            
            
            -Investment
      tax credits
            
            
            (2,904
            )
            
            
            (3,324
            )
            
            
            (3,468
            )Flow-through
      of depreciation items
            
            
            2,682
            
            
            
            2,143
            
            
            
            1,764Gains
      on the sale and leaseback of PVNGS Units 1 and 2
            
            
            (55
            )
            
            
            (64
            )
            
            
            (73
            )Reversal
      of deferred income taxes accrued at prior tax rates
            
            
            (1,109
            )
            
            
            (1,109
            )
            
            
            (1,185
            )Research
      and development credit
            
            
            (220
            )
            
            
            -
            
            
            
            (1,290
            )Affordable
      housing credit
            
            
            (750
            )
            
            
            (750
            )
            
            
            (750
            )Allowance
      for funds used during construction
            
            
            (394
            )
            
            
            (523
            )
            
            
            (332
            )State
      income tax
            
            
            (6,238
            )
            
            
            (828
            )
            
            
            3,602Favorable
      IRS settlement
            
            
            -
            
            
            
            (16,038
            )
            
            
            -Texas
      margin tax and related deferred tax adjustments
            
            
            (2,494
            )
            
            
            -
            
            
            
            -Other
            
            
            (1,912
            )
            
            
            1,630
            
            
            
            (144
            )Total income taxes (benefit)
            
            $
            (90,816
            )
            
            $
            3,226
            
            
            $
            55,530Effective
      tax rate
            
            
            22.97
            %
            
            
            5.11
            %
            
            
            33.86
            %





B-65
 PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008, 2007 and 2006


The
components of PNMR’s net accumulated deferred income tax liability
were:





December
      31,2008
            
            
            2007(In
      thousands)Deferred Tax Assets-other
            
            $
            106,717
            
            
            $
            75,538Deferred
      Tax Liabilities:Depreciation and plant related
            
            
            (394,495
            )
            
            
            (351,205
            )Investment tax credit
            
            
            (23,834
            )
            
            
            (26,825
            )Regulatory assets related to income taxes
            
            
            (84,067
            )
            
            
            (90,641
            )Stranded costs
            
            
            (39,203
            )
            
            
            (47,197
            )Optim Energy
            
            
            (39,375
            )
            
            
            (48,781
            )Other
            
            
            (122,296
            )
            
            
            (137,901
            )Total
      deferred tax liabilities
            
            
            (703,270
            )
            
            
            (702,550
            )Net
      accumulated deferred income tax liabilities
            
            $
            (596,553
            )
            
            $
            (627,012
            )





The
following table reconciles the change in PNMR’s net accumulated deferred income
tax liability to the deferred income tax benefit included in the Consolidated
Statement of Earnings:





Year
      EndedDecember
      31, 2008(In
      thousands)Net
      change in deferred income tax liability per above table
            
            $
            (30,459
            )Change
      in tax effects of income tax related regulatory assets and
      liabilities
            
            
            1,366Tax
      effect of mark-to-market adjustments
            
            
            (22,898
            )Tax
      effect of excess pension liability
            
            
            2,642FIN48
      adjustment
            
            
            286Deferred
      tax expense related to discontinued operations
            
            
            (14,789
            )Other
            
            
            2,371Deferred
      income tax (benefit)
            
            $
            (61,481
            )





The
Company defers investment tax credits related to rate regulated assets and
amortizes them over the estimated useful lives of those assets.











B-66
 PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008, 2007 and 2006


PNM





PNM’s
income taxes (benefit)  from continuing operations consist of the
following components:





Year
      Ended December 31,2008
            
            
            2007
            
            
            2006(In
      thousands)Current
      federal income tax
            
            $
            10,449
            
            
            $
            (5,295
            )
            
            $
            24,866Current
      state income tax
            
            
            2,167
            
            
            
            (1,225
            )
            
            
            5,737Deferred
      federal income tax
            
            
            (16,627
            )
            
            
            16,795
            
            
            
            2,889Deferred
      state income tax
            
            
            (3,305
            )
            
            
            3,850
            
            
            
            832Amortization
      of accumulated investment tax credits
            
            
            (2,713
            )
            
            
            (2,905
            )
            
            
            (2,760
            )Total income taxes (benefit)
            
            $
            (10,029
            )
            
            $
            11,220
            
            
            $
            31,564





PNM’s
provision for income taxes from continuing operations differed from the federal
income tax computed at the statutory rate for each of the years
shown.  The differences are attributable to the following
factors:





Year
      Ended December 31,2008
            
            
            2007
            
            
            2006(In
      thousands)Federal
      income tax at statutory rates
            
            $
            (26,776
            )
            
            $
            12,114
            
            
            $
            31,380Impairment
      of goodwill
            
            
            17,900
            
            
            
            -
            
            
            
            -Investment
      tax credits
            
            
            (2,713
            )
            
            
            (2,905
            )
            
            
            (2,761
            )Flow-through
      of depreciation items
            
            
            2,682
            
            
            
            2,143
            
            
            
            1,764Gains
      on the sale and leaseback of PVNGS Units 1 and 2
            
            
            (55
            )
            
            
            (64
            )
            
            
            (73
            )Reversal
      of deferred income taxes accrued at prior tax rates
            
            
            (969
            )
            
            
            (969
            )
            
            
            (969
            )Research
      and development credit
            
            
            -
            
            
            
            -
            
            
            
            (1,114
            )Allowance
      for funds used during construction
            
            
            (334
            )
            
            
            (472
            )
            
            
            (237
            )State
      income tax
            
            
            (824
            )
            
            
            1,788
            
            
            
            4,272Other
            
            
            1,060
            
            
            
            (415
            )
            
            
            (698
            )Total income taxes (benefit)
            
            $
            (10,029
            )
            
            $
            11,220
            
            
            $
            31,564Effective
      tax rate
            
            
            13.11
            %
            
            
            32.42
            %
            
            
            35.21
            %





B-67
 PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008, 2007 and 2006


The
components of PNM’s net accumulated deferred income tax liability
were:





December
      31,2008
            
            
            2007(In
      thousands)Deferred
      Tax Assets – other
            
            $
            61,190
            
            
            $
            48,714Deferred
      Tax Liabilities:Depreciation and plant related
            
            
            (294,025
            )
            
            
            (275,816
            )Investment tax credit
            
            
            (23,834
            )
            
            
            (26,634
            )Regulatory assets related to income taxes
            
            
            (72,302
            )
            
            
            (75,555
            )Pension
            
            
            (27,131
            )
            
            
            (28,463
            )Other
            
            
            (82,727
            )
            
            
            (78,310
            )Total
      deferred tax liabilities
            
            
            (500,019
            )
            
            
            (484,778
            )Net
      accumulated deferred income tax liabilities
            
            $
            (438,829
            )
            
            $
            (436,064
            )





The
following table reconciles the change in PNM’s net accumulated deferred income
tax liability to the deferred income tax benefit included in the Consolidated
Statement of Earnings:





Year
      EndedDecember
      31, 2008(In
      thousands)Net
      change in deferred income tax liability per above table
            
            $
            2,765Change
      in tax effects of income tax related regulatory assets and
      liabilities
            
            
            1,477Tax
      effect of mark-to-market adjustments
            
            
            (15,616
            )Tax
      effect of excess pension liability
            
            
            2,123FIN
      48 adjustment
            
            
            286Deferred
      tax expense related to discontinued operations
            
            
            (14,789
            )Other
            
            
            1,109Deferred
      income tax liability (benefit)
            
            $
            (22,645
            )








B-68
 PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008, 2007 and 2006


TNMP





TNMP’s
income taxes from continuing operations consist of the following
components:





Year
      Ended December 31,2008
            
            
            2007
            
            
            2006(In
      thousands)Current
      federal income tax
            
            $
            17,233
            
            
            $
            18,716
            
            
            $
            1,532Current
      state income tax
            
            
            1,609
            
            
            
            973
            
            
            
            411Deferred
      federal income tax
            
            
            11,285
            
            
            
            (9,162
            )
            
            
            5,013Deferred
      state income tax
            
            
            (18,808
            )
            
            
            538
            
            
            
            (462
            )Amortization
      of accumulated investmenttax credits
            
            
            (191
            )
            
            
            (418
            )
            
            
            (707
            )Total income taxes
            
            $
            11,128
            
            
            $
            10,647
            
            
            $
            5,787





TNMP’s
provision for income taxes, from continuing operations differed from the federal
income tax computed at the statutory rate for each of the periods
shown.  The differences are attributable to the following
factors:





Year
      Ended December 31,2008
            
            
            2007
            
            
            2006(In
      thousands)Federal
      income tax at statutory rates
            
            $
            817
            
            
            $
            10,169
            
            
            $
            6,267Impairment
      of goodwill
            
            
            12,059
            
            
            
            -
            
            
            
            -Investment
      tax credits
            
            
            (191
            )
            
            
            (418
            )
            
            
            (707
            )Reversal
      of deferred income taxes accruedat
      prior tax rates
            
            
            (141
            )
            
            
            (141
            )
            
            
            (216
            )Allowance
      for funds used during construction
            
            
            (10
            )
            
            
            (45
            )
            
            
            (94
            )State
      income tax
            
            
            1,045
            
            
            
            985
            
            
            
            387Texas
      margin tax and related deferred tax adjustments
            
            
            (2,494
            )
            
            
            -
            
            
            
            -Other
            
            
            43
            
            
            
            97
            
            
            
            150Total income taxes
            
            $
            11,128
            
            
            $
            10,647
            
            
            $
            5,787Effective
      tax rate
            
            
            476.65
            %
            
            
            36.64
            %
            
            
            32.32
            %





B-69
 PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008, 2007 and 2006


The
components of TNMP’s net accumulated deferred income tax liability at December
31 were:





December
      31,2008
            
            
            2007(In
      thousands)Deferred
      Tax Assets:Regulatory
      liabilities related to income taxes
            
            $
            7,105
            
            
            $
            8,556Deferred
      Tax Assets – other
            
            
            29,043
            
            
            
            8,091Total
      deferred tax assets
            
            
            36,148
            
            
            
            16,647Deferred
      Tax Liabilities:Depreciation and plant related
            
            
            (94,682
            )
            
            
            (74,638
            )Stranded costs
            
            
            (39,203
            )
            
            
            (47,197
            )Regulatory assets related to income taxes
            
            
            (11,765
            )
            
            
            (15,086
            )Other
            
            
            (1,691
            )
            
            
            (191
            )Total deferred tax liabilities
            
            
            (147,341
            )
            
            
            (137,112
            )Net
      accumulated deferred income tax liabilities
            
            $
            (111,193
            )
            
            $
            (120,465
            )








The
following table reconciles the change in TNMP’s net accumulated deferred income
tax liability to the deferred income tax benefit included in the Consolidated
Statement of Earnings:





Year
      EndedDecember
      31, 2008(In
      thousands)Net
      change in deferred income tax liability per above table
            
            $
            (9,272
            )Change
      in tax effects of income tax related regulatory assets and
      liabilities
            
            
            (112
            )Tax
      effect of excess pension liability
            
            
            520FIN48
      adjustments
            
            
            541Other
            
            
            609Deferred
      income tax (benefit)
            
            $
            (7,714
            )





In July
2006, the FASB issued FIN 48, which requires that the Company recognize only the
impact of tax positions that, based on their technical merits, are more likely
than not to be sustained upon an audit by the taxing authority.  FIN
48 also specifies standards for recognizing interest income and expense related
to income taxes.





The
Company adopted the provisions of FIN 48 on January 1, 2007.  As a
result, PNMR established a liability under FIN 48 of $33.9 million, reduced its
previously recorded tax liabilities by $36.7 million, decreased the January 1,
2007 balance of retained earnings by $1.6 million, increased interest payable by
$3.2 million, and decreased goodwill by $1.2 million.  PNM established
an asset under FIN 48 of $3.6 million, increased its deferred tax liabilities by
$5.4 million, decreased the January 1, 2007 balance of retained earnings by $1.1
million, and increased interest receivable by $0.6 million.  TNMP
established no liability under FIN 48, recorded interest receivable of $3.3
million, increased the January 1, 2007 balance of retained earnings by $0.7
million, increased deferred tax liabilities by $1.3 million, and decreased
goodwill by $1.3 million.





As of
January 1, 2007 under FIN 48, PNMR had $33.9 million of unrecognized tax
benefits, all of which would affect the effective tax rate if recognized; PNM
had $3.6 million of unrecognized tax expense, none of which would affect the
effective tax rate if recognized; and TNMP had no unrecognized tax
benefits.  As a result of settlements with the IRS, PNMR recognized
$16.3 million of income tax benefit during 2007.  Including this
benefit, PNMR’s effective tax rate was 5.11% for the year ended December 31,
2007.  This non-recurring benefit reduced PNMR’s effective tax rate by
25.76% for the year ended December 31, 2007.





B-70


PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008, 2007 and 2006





PNMR
            
            
            PNM
            
            
            TNMP(In
      thousands)Balance
      at January 1, 2007
            
            $
            33,895
            
            
            $
            (3,564
            )
            
            $
            -Additions
      based on tax positions related to 2007
            
            
            15,721
            
            
            
            (29
            )
            
            
            -Reductions
      for tax positions of prior years
            
            
            (15,786
            )
            
            
            -
            
            
            
            -Settlements
            
            
            (15,578
            )
            
            
            3,346
            
            
            
            -Balance
      at December 31, 2007
            
            
            18,252
            
            
            
            (247
            )
            
            
            -Additions
      based on tax positions related to 2008
            
            
            (1,111
            )
            
            
            316
            
            
            
            541Reductions
      for tax positions of prior years
            
            
            (753
            )
            
            
            -
            
            
            
            -Settlements
            
            
            -
            
            
            
            -
            
            
            
            -Balance
      at December 31, 2008
            
            $
            16,388
            
            
            $
            69
            
            
            $
            541





Included
in the balance at December 31, 2008 for PNMR are $2.8 million of unrecognized
tax benefits that, if recognized, would affect the effective tax
rate.  None of PNM’s or TNMP’s unrecognized tax liabilities at
December 31, 2008 would affect the effective tax rate if
recognized.  The Company believes that it is reasonably possible that
approximately $0.4 million of PNM’s unrecognized tax benefits will be reduced or
settled in 2009 as a result of the conclusion of income tax
examinations.





Estimated
interest income related to refunds the Company expects to receive is included in
Other Income and estimated interest expense and penalties related to potential
cash settlements are included in Interest Expense in the Consolidated Statements
of Operations.  Interest income under FIN 48 for the year ended
December 31, 2007 was $17.2 million for PNMR and $10.7 million for
PNM.  Interest expense under FIN 48 was $0.1 million for
TNMP.  At December 31, 2007, PNMR had accumulated accrued interest
receivable of $11.6 million and accumulated accrued interest payable of $2.4
million; PNM had accumulated interest receivable of $11.6 million and
accumulated interest payable of $0.2 million; and TNMP had accumulated interest
payable of $0.6 million.  Interest expense under FIN 48 for the year
ended December 31, 2008 was $2.5 million for PNMR and $4.9 million for
PNM.  Interest income under FIN 48 for the year ended December 31,
2008 was $0.5 million for TNMP.  At December 31, 2008 PNMR had
accumulated accrued interest receivable of $7.0 million and accumulated accrued
interest payable of $0.2 million; PNM had accumulated interest receivable of
$6.5 million, and TNMP had accumulated accrued interest payable of $0.1
million.





The
Company files a federal consolidated and several consolidated and separate state
income tax returns.  The tax years prior to 2001 are closed to
examination by either federal or state taxing authorities.  2001 and
2002 are open for examination only for certain items.  Tax year 2004
is closed to examination by federal taxing authorities, but open for some
states.  Other tax years are open to examination by federal and state
taxing authorities.





(12)                      Pension
and Other Postretirement Benefits





PNMR and
its subsidiaries maintain qualified defined benefit pension plans,
postretirement benefit plans providing medical and dental benefits, and
executive retirement programs (“PNM Plans” and “TNMP Plans”).  PNMR
maintains the legal obligation for the benefits owed to participants under these
plans. As discussed in Note 2, PNM completed the sale of its gas operations to
NMGC on January 30, 2009.  PNM retained the obligations under the
defined benefit pension plans and executive retirement plans relating to
employees that transferred to NMGC upon the sale.  NMGC assumed the
postretirement medical and dental obligations for the transferred
employees.





Participants
in the PNM Plans include eligible employees and retirees of PNMR and other
subsidiaries of PNMR. Participants in the TNMP Plans include eligible employees
and retirees of TNMP, First Choice and other subsidiaries of TNP. The PNM
pension plan was frozen at the end of 1997 with regard to new participants,
salary levels and benefits. Through December 31, 2007, additional credited
service could be accrued under the PNM




B-71


PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008, 2007 and 2006





In
September 2006, the FASB issued SFAS 158, which requires a plan sponsor to
(a) recognize in its
statement of financial position an asset for a plan’s overfunded status or a
liability for a plan’s underfunded status; (b) measure a plan’s assets
and its obligations that determine its funded status as of the end of the
employer’s fiscal year; and (c) recognize changes in the
funded status of a defined benefit postretirement plan in the year in which the
changes occur. Such changes are to be reported in other comprehensive income.
SFAS 158 became effective as of December 31, 2006.





SFAS 158
also requires unrecognized prior service costs and unrecognized gains or losses
to be recorded in AOCI and subsequently amortized. The amortization of these
incurred costs will ultimately be included in SFAS 87 or SFAS 106 expenses in
subsequent years. To the extent the amortization of these items will ultimately
be recovered in future rates as SFAS 87 and SFAS 106 expenses, PNM and TNMP
records the costs as a regulatory asset or regulatory liability.





The
Company has in place, for the PNM Plans and TNMP Plans, a policy that defines
the investment objectives, establishes performance goals of the asset managers
and provides procedures for the manner in which investments are to be reviewed.
The plans implement investment strategies to achieve the following
objectives:





·
            Maximize
      the return on assets, commensurate with the risk that the Corporate
      Investment Committee deems appropriate to:  meet the obligations
      of the pension plans and other postretirement benefits plans; minimize the
      volatility of expense; and account for contingencies;
  and


·
            Generate
      a rate of return for the total portfolio that equals or exceeds the
      actuarial investment rate
assumption.





Management
is responsible for the determination of the asset target mix and the expected
rate of return.   The target asset allocations are determined
based on consultations with external investment advisors.  Under SFAS
87and SFAS 106,
as amended by SFAS 158, the expected long-term rate of return on pension and
postretirement plan assets is calculated on the market-related value of assets.
SFAS 87 and SFAS 106 require that actual gains and losses on pension and
postretirement plan assets be recognized in the market-related value of assets
equally over a period of not more than five years, which reduces year-to-year
volatility. For the PNM Plans and TNMP Plans, the market-related value of assets
is equal to the prior year’s market related value of assets adjusted for
contributions, benefit payments and investment gains and losses that lie within
a corridor of plus or minus 4.0% around the expected return on market value.
Gains and losses that lie outside the corridor are amortized over five
years.  This market-related valuation recognizes the portion of return
that is outside the range over a five-year period from the year in which the
return occurs. As such, the future value of assets will be impacted as
previously deferred returns are recorded.





Pension
Plans





For
defined benefit pension plans, including the executive retirement plans, the PBO
represents the actuarial present value of all benefits attributed by the pension
benefit formula to employee service rendered prior to that date using
assumptions regarding future compensation levels. The accumulated benefit
obligation represents the PBO without considering future compensation
levels.  Since the plans are frozen, the PBO and accumulated benefit
obligation are equal.  The following table presents information about
the PBO, fair value of plan assets, and funded status of the
plans:


B-72
 PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008, 2007 and 2006





PNM
      Plan
            
            
            TNMP
      PlanYear
      Ended December 31,
            
            
            Year
      Ended December 31,2008
            
            
            2007
            
            
            2008
            
            
            2007(In
      thousands)PBO
      at beginning of year
            
            $
            498,859
            
            
            $
            535,717
            
            
            $
            66,619
            
            
            $
            72,963Service
      cost
            
            
            -
            
            
            
            144
            
            
            
            -
            
            
            
            -Interest
      cost
            
            
            33,268
            
            
            
            31,811
            
            
            
            4,243
            
            
            
            4,229Actuarial
      (gain) loss
            
            
            (8,284
            )
            
            
            (39,535
            )
            
            
            279
            
            
            
            (2,821
            )Benefits
      paid
            
            
            (32,085
            )
            
            
            (29,278
            )
            
            
            (7,113
            )
            
            
            (7,752
            )PBO
      at end of year
            
            
            491,758
            
            
            
            498,859
            
            
            
            64,028
            
            
            
            66,619Fair
      value of plan assets at beginning of year
            
            
            501,718
            
            
            
            485,775
            
            
            
            81,538
            
            
            
            81,816Actual return on plan assets
            
            
            (136,865
            )
            
            
            45,221
            
            
            
            (21,001
            )
            
            
            7,474Benefits paid
            
            
            (32,085
            )
            
            
            (29,278
            )
            
            
            (7,113
            )
            
            
            (7,752
            )Fair
      value of plan assets at end of year
            
            
            332,768
            
            
            
            501,718
            
            
            
            53,424
            
            
            
            81,538Funded
      status-asset (liability) for pension benefits
            
            $
            (158,990
            )
            
            $
            2,859
            
            
            $
            (10,604
            )
            
            $
            14,919








The
following table presents information about prior service cost and net actuarial
(gain) loss in AOCI as of December 31, 2008.





PNM
      Plan
            
            
            TNMP
      PlanDecember
      31, 2008
            
            
            December
      31, 2008Prior
      service cost
            
            
            Net
      actuarial (gain) loss
            
            
            Net
      actuarial
              (gain)
      loss(In
      thousands)Amounts
      in AOCI not yet recognized in net periodic cost (income) at beginning of
      year
            
            $
            102
            
            
            $
            6,593
            
            
            $
            (1,087
            )Experience
      loss (gain)
            
            
            -
            
            
            
            169,926
            
            
            
            27,915Regulatory
      asset (liability) adjustment
            
            
            -
            
            
            
            (165,117
            )
            
            
            (26,542
            )Amortization
      recognized in net periodic cost
            
            
            (9
            )
            
            
            (54
            )
            
            
            8Amounts
      in AOCI not yet recognized in net periodic cost (income) at end of
      year
            
            $
            93
            
            
            $
            11,348
            
            
            $
            294Amortization
      expected to be recognized in AOCI in 2009
            
            $
            (9
            )
            
            $
            (108
            )
            
            $
            -





B-73
 PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008, 2007 and 2006





The
following table presents the components of net periodic cost (income) recognized
in the Consolidated Statements of Earnings:





Year
      Ended December 31,2008
            
            
            2007
            
            
            2006(In
      thousands)PNM
      PlanService
      cost
            
            $
            -
            
            
            $
            144
            
            
            $
            504Interest
      cost
            
            
            33,268
            
            
            
            31,811
            
            
            
            30,842Long-term
      rate of return on plan assets
            
            
            (41,345
            )
            
            
            (40,780
            )
            
            
            (40,556
            )Amortization
      of net (gain) loss
            
            
            1,924
            
            
            
            3,890
            
            
            
            4,839Amortization
      of prior service cost
            
            
            317
            
            
            
            317
            
            
            
            317Net
      periodic (income) cost
            
            $
            (5,836
            )
            
            $
            (4,618
            )
            
            $
            (4,054
            )TNMP
      PlanService
      cost
            
            $
            -
            
            
            $
            -
            
            
            $
            -Interest
      cost
            
            
            4,243
            
            
            
            4,229
            
            
            
            4,339Long-term
      rate of return on plan assets
            
            
            (6,635
            )
            
            
            (6,840
            )
            
            
            (7,018
            )Amortization
      of net (gain) loss
            
            
            (146
            )
            
            
            (7
            )
            
            
            -Amortization
      of prior service cost
            
            
            -
            
            
            
            -
            
            
            
            -Net
      periodic benefit (income) cost
            
            $
            (2,538
            )
            
            $
            (2,618
            )
            
            $
            (2,679
            )





The
following significant weighted-average assumptions were used to determine the
projected benefit obligation and net periodic cost (income):





Year
      Ended December 31,PNM
      Plan
            
            2008
            
            
            2007
            
            
            2006Discount
      rate for determining projected benefit obligationat December 31
            
            
            7.25
            %
            
            
            6.88
            %
            
            
            6.10
            %Discount
      rate for determining net periodic cost (income)
            
            
            6.88
            %
            
            
            6.10
            %
            
            
            5.75
            %Long-term
      rate of return on plan assets
            
            
            8.50
            %
            
            
            8.75
            %
            
            
            9.00
            %Rate
      of compensation increase
            
            
            N/A
            
            
            
            N/A
            
            
            
            N/ATNMP
      PlanDiscount
      rate for determining projected benefit obligationat December 31
            
            
            7.25
            %
            
            
            6.72
            %
            
            
            6.10
            %Discount
      rate for determining net periodic cost (income)
            
            
            6.72
            %
            
            
            6.10
            %
            
            
            5.75
            %Long-term
      rate of return on plan assets
            
            
            8.50
            %
            
            
            8.75
            %
            
            
            9.00
            %Rate
      of compensation increase
            
            
            N/A
            
            
            
            N/A
            
            
            
            N/A





The
assumed discount rate for determining the PBO was determined based on a review
of long-term high-grade bonds and management’s expectations. The change in
discount rate resulted in a decrease in the PNM and TNMP PBO of $18.0 million
and $2.6 million at December 31, 2008.  Should actual experience
differ from actuarial assumptions, the PBO and net periodic cost (income) would
be affected.





The
expected long-term rate of return on plan assets reflects the average rate of
earnings expected on the funds invested, or to be invested, to provide for the
benefits included in the PBO.  Factors that are considered include,
but are not limited to, historic returns on plan assets, current market
information on long-term returns (e.g., long-term bond rates) and current and
target asset allocations between asset categories. The expected long-term rate
of return assumption for the PNM and TNMP pension plans compares to the actual
return (loss) of (28.2)% and (26.9)% for the year ended December 31, 2008. If
all other factors were to remain unchanged, a 1% decrease in the




B-74


PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008, 2007 and 2006





The
following table outlines the asset allocations for the pension
plans:








PNM
      Plan
            
            
            TNMP
      PlanDecember
      31,
            
            
            December
      31,2008
            
            
            2007
            
            
            2008
            
            
            2007Equity
      securities
            
            
            49
            %
            
            
            57
            %
            
            
            42
            %
            
            
            50
            %Fixed
      income
            
            
            21
            %
            
            
            21
            %
            
            
            23
            %
            
            
            23
            %Alternative
      investments
            
            
            30
            %
            
            
            22
            %
            
            
            35
            %
            
            
            27
            %100
            %
            
            
            100
            %
            
            
            100
            %
            
            
            100
            %





The
pension plans target the following asset allocations:





PNM
            
            
            TNMPPlan
            
            
            PlanEquity
      securities
            
            
            57.5
            %
            
            
            57.5
            %Fixed
      income
            
            
            22.5
            %
            
            
            22.5
            %Alternative
      investments
            
            
            20.0
            %
            
            
            20.0
            %100
            %
            
            
            100
            %





Alternative
investments include real estate, private equity, and hedge funds. The private
equity and hedge fund investments are limited partner structures that are
multi-manager multi-strategy funds. Real estate investments are with a private
real estate investment trust that invests in a diversified portfolio of real
estate, mortgages, and other real estate related assets. This investment
approach gives broad diversification and minimizes risk compared to a direct
investment in any one component of the funds.





The
following pension benefit payments, which reflect expected future service, are
expected to be paid:





PNM
            
            
            TNMPPlan
            
            
            Plan(In
      thousands)2009
            
            $
            33,457
            
            
            $
            6,7862010
            
            $
            34,529
            
            
            $
            6,4582011
            
            $
            35,756
            
            
            $
            6,4662012
            
            $
            37,148
            
            
            $
            6,5082013
            
            $
            38,633
            
            
            $
            6,005Years
      2014 – 2018
            
            $
            209,304
            
            
            $
            27,943





There has
been a significant decline in the general price levels of marketable equity
securities held by the pension plans in late 2008 and in early 2009. The impacts
of these declines on future funding and expense will not be quantified until the
funding and expense valuations for 2009 are performed.  Although,
there are no contributions to the plans expected in 2009, it is likely that
increased levels of funding will be required thereafter and additional amounts
will be recorded as expense.





Other
Postretirement Benefits





For
postretirement benefit plans, the APBO is the actuarial present value as of a
date of all future benefits attributed under the terms of the postretirement
benefit plan to employee service rendered to that date.





B-75


PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008, 2007 and 2006





PNM
      Plan
            
            
            TNMP
      PlanYear
      Ended December 31,
            
            
            Year
      Ended December 31,2008
            
            
            2007
            
            
            2008
            
            
            2007(In
      thousands)
            
            
            (In
      thousands)APBO
      at beginning of year
            
            $
            123,672
            
            
            $
            129,329
            
            
            $
            10,779
            
            
            $
            11,197Service cost
            
            
            713
            
            
            
            2,530
            
            
            
            284
            
            
            
            394Interest cost
            
            
            8,344
            
            
            
            7,712
            
            
            
            715
            
            
            
            661Participant contributions
            
            
            1,579
            
            
            
            1,482
            
            
            
            348
            
            
            
            160Actuarial (gain) loss
            
            
            (5,233
            )
            
            
            (9,283
            )
            
            
            (869
            )
            
            
            (1,180
            )Benefits paid
            
            
            (8,232
            )
            
            
            (8,098
            )
            
            
            (692
            )
            
            
            (453
            )APBO
      at end of year
            
            
            120,843
            
            
            
            123,672
            
            
            
            10,565
            
            
            
            10,779Fair
      value of plan assets at beginning of year
            
            
            71,567
            
            
            
            66,790
            
            
            
            7,907
            
            
            
            7,162Actual return on plan assets
            
            
            (20,637
            )
            
            
            4,949
            
            
            
            (2,299
            )
            
            
            661Employer contributions
            
            
            5,203
            
            
            
            6,444
            
            
            
            428
            
            
            
            377Participant contributions
            
            
            1,579
            
            
            
            1,482
            
            
            
            348
            
            
            
            160Benefits paid
            
            
            (8,232
            )
            
            
            (8,098
            )
            
            
            (692
            )
            
            
            (453
            )Fair
      value of plan assets at end of year
            
            
            49,480
            
            
            
            71,567
            
            
            
            5,692
            
            
            
            7,907Funded
      status-APBO net (liability)
            
            $
            (71,363
            )
            
            $
            (52,105
            )
            
            $
            (4,873
            )
            
            $
            (2,872
            )





The APBO
net balance sheet liability for the PNM Plan above includes benefit costs of PNM
Gas employees.  Approximately $15.7 million of this APBO liability was
transferred to the purchaser of PNM Gas on January 30,
2009.   PNM anticipates it will recognize a curtailment gain in
2009 in connection with this transfer.





The
following table presents information about prior service cost and net actuarial
(gain) loss in AOCI as of December 31, 2008.





PNM
      Plan
            
            
            TNMP
      PlanDecember
      31, 2008
            
            
            December
      31, 2008Prior
      service cost/(credit)
            
            
            Net
      actuarial (gain)/loss
            
            
            Prior
      service cost
            
            
            Net
      actuarial (gain)/loss(In
      thousands)Amount
      in AOCI not yet recognized in net periodic cost (income) at beginning of
      year
            
            $
            (1,132
            )
            
            $
            3,543
            
            
            $
            18
            
            
            $
            (196
            )Experience
      loss (gain)
            
            
            -
            
            
            
            21,533
            
            
            
            -
            
            
            
            1,916Regulatory
      asset (liability) adjustment
            
            
            -
            
            
            
            (20,924
            )
            
            
            -
            
            
            
            (1,822
            )Amortization
      recognized in net periodic cost
            
            
            161
            
            
            
            (136
            )
            
            
            (3
            )
            
            
            13Amounts
      in AOCI not yet recognized in net periodic cost (income) at end of
      year
            
            $
            (971
            )
            
            $
            4,016
            
            
            $
            15
            
            
            $
            (89
            )Amortization
      expected to be recognized in AOCI in 2009
            
            $
            (161
            )
            
            $
            (136
            )
            
            $
            (3
            )
            
            $
            13





The 2009
expected amortization for the PNM plan above does not reflect the impact of the
anticipated plan curtailment gain on the sale of PNM Gas.





B-76


PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008, 2007 and 2006





Year
      Ended December 31,2008
            
            
            2007
            
            
            2006(In
      thousands)PNM
      PlanService
      cost
            
            $
            713
            
            
            $
            2,530
            
            
            $
            2,713Interest
      cost
            
            
            8,344
            
            
            
            7,712
            
            
            
            7,367Long-term
      rate of return on plan assets
            
            
            (6,128
            )
            
            
            (5,856
            )
            
            
            (5,418
            )Amortization
      of net gain and regulatory liability
            
            
            4,816
            
            
            
            5,842
            
            
            
            6,680Amortization
      of prior service cost and regulatory asset
            
            
            (5,687
            )
            
            
            (5,687
            )
            
            
            (5,687
            )Net
      periodic benefit cost
            
            $
            2,058
            
            
            $
            4,541
            
            
            $
            5,655TNMP
      PlanService
      cost
            
            $
            284
            
            
            $
            394
            
            
            $
            424Interest
      cost
            
            
            716
            
            
            
            661
            
            
            
            710Long-term
      rate of return on plan assets
            
            
            (486
            )
            
            
            (456
            )
            
            
            (456
            )Amortization
      of prior service cost and regulatory asset
            
            
            60
            
            
            
            60
            
            
            
            60Amortization
      of net (gain) loss and regulatory asset
            
            
            (271
            )
            
            
            (156
            )
            
            
            -Net
      periodic benefit cost
            
            $
            303
            
            
            $
            503
            
            
            $
            738





The
following significant weighted-average assumptions were used to determine the
accumulated postretirement benefit obligation and postretirement benefit
cost:





Year
      Ended December 31,PNM
      Plan
            
            2008
            
            
            2007
            
            
            2006Discount
      rate for determining accumulated postretirementbenefit obligation at December 31
            
            
            7.25%
            
            
            
            6.91%
            
            
            
            6.10%Discount
      rate for determining postretirement benefit cost
            
            
            6.91%
            
            
            
            6.10%
            
            
            
            5.75%Long-term
      rate of return on plan assets
            
            
            8.50%
            
            
            
            8.75%
            
            
            
            9.00%Rate
      of compensation increase
            
            
            N/A
            
            
            
            N/A
            
            
            
            N/ATNMP
      PlanDiscount
      rate for determining accumulated postretirementbenefit obligation at December 31
            
            
            7.25%
            
            
            
            6.91%
            
            
            
            6.10%Discount
      rate for determining postretirement benefit cost
            
            
            6.91%
            
            
            
            6.10%
            
            
            
            5.75%Long-term
      rate of return on plan assets
            
            
            6.50%
            
            
            
            6.70%
            
            
            
            6.90%Rate
      of compensation increase
            
            
            N/A
            
            
            
            N/A
            
            
            
            N/A





The
assumed discount rate for determining the APBO was determined based on a review
of long-term high-grade bonds and management’s expectations.  The
change in discount rate resulted in a decrease in the PNM and TNMP APBO
obligation of $4.3 million and $0.3 million.  Should actual experience
differ from actuarial assumptions, the APBO and postretirement benefit cost
would be affected.





The
expected long-term rate of return on plan assets reflects the average rate of
earnings expected on the funds invested, or to be invested, to provide for the
benefits included in the APBO. Factors that are considered include, but are not
limited to, historic returns on plan assets, current market information on
long-term returns (e.g., long-term bond rates) and current and target asset
allocations between asset categories. The expected long-term rate of return
assumption for the PNM and TNMP postretirement benefit plans compares to the
actual return (loss) of (29.1)% and (28.9)% for the year ended December 31,
2008. If all other factors were to remain unchanged, a 1% decrease in the
expected long-term rate of return would cause PNM’s and TNMP’s 2009
postretirement benefit cost to increase $0.7 million and $0.1 million (analogous
changes would result from a 1% increase).





B-77


PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008, 2007 and 2006





The
following table shows the assumed health care cost trend rates:





PNM
      PlanDecember
      31,2008
            
            
            2007Health
      care cost trend rate assumed for next year
            
            
            9.0%
            
            
            
            9.0%Rate
      to which the cost trend rate is assumedto
      decline (the ultimate trend rate)
            
            
            5.0%
            
            
            
            5.0%Year
      that the rate reaches the ultimate trend rate
            
            2014
            
            
            2013





The
following table shows the impact of a one-percentage-point change in assumed
health care cost trend rates:





PNM
      Plan1-Percentage-
            
            
            1-Percentage-Point
      Increase
            
            
            Point
      Decrease(In
      thousands)Effect
      on total of service and interest cost
            
            $
            740
            
            
            $
            (637
            )Effect
      on APBO
            
            $
            10,328
            
            
            $
            (8,935
            )





The
following table outlines the asset allocation for the other postretirement
benefits:





PNM
      Plan
            
            
            TNMP
      PlanDecember
      31,
            
            
            December
      31,2008
            
            
            2007
            
            
            2008
            
            
            2007Equity
      securities
            
            
            58%
            
            
            
            68%
            
            
            
            58%
            
            
            
            71%Debt
      securities
            
            
            42%
            
            
            
            32%
            
            
            
            42%
            
            
            
            29%100%
            
            
            
            100%
            
            
            
            100%
            
            
            
            100%





The
Company is currently targeting an asset allocation of 70% equity securities and
30% debt securities for both the PNM and the TNMP other postretirement benefits
plan.





PNM
expects to make contributions totaling $2.5 million to the PNM postretirement
benefit plan in 2009. TNMP expects to make contributions totaling $0.3 million
to the TNMP postretirement benefit plan in 2009.





B-78
 PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008, 2007 and 2006


The
following other postretirement benefit payments, which reflect expected future
service, are expected to be paid:








PNM
            
            
            TNMPPlan
            
            
            Plan(In
      thousands)2009
            
            $
            6,661
            
            
            $
            9162010
            
            $
            7,084
            
            
            $
            8952011
            
            $
            7,713
            
            
            $
            9052012
            
            $
            8,357
            
            
            $
            8942013
            
            $
            8,868
            
            
            $
            888Years
      2014 – 2018
            
            $
            53,345
            
            
            $
            4,693








Executive
Retirement Programs





For the
executive retirement programs, the following table presents information about
the PBO and funded status of the plans:





PNM
      Plan
            
            
            TNMP
      PlanYear
      Ended
              December
      31,
            
            
            Year
      Ended
              December
      31,2008
            
            
            2007
            
            
            2008
            
            
            2007(In
      thousands)PBO
      at beginning of year
            
            $
            17,262
            
            
            $
            18,597
            
            
            $
            1,199
            
            
            $
            1,325Service
      cost
            
            
            57
            
            
            
            57
            
            
            
            -
            
            
            
            -Interest
      cost
            
            
            1,135
            
            
            
            1,088
            
            
            
            75
            
            
            
            76Actuarial
      gain
            
            
            (555
            )
            
            
            (923
            )
            
            
            14
            
            
            
            (39
            )Benefits
      paid
            
            
            (1,511
            )
            
            
            (1,557
            )
            
            
            (163
            )
            
            
            (163
            )PBO
      at end of year-funded status (liability)
            
            $
            (16,388
            )
            
            $
            (17,262
            )
            
            $
            (1,125
            )
            
            $
            (1,199
            )





PNM has
an irrevocable grantor "Rabbi" trust established in connection with the
executive retirement program.  Under the terms of the trust, PNM may,
but is not obligated to, provide funds to the trust, which was established with
an independent trustee, to aid it in meeting its obligations under the
program.  Marketable securities with a fair value of $0.8 million were
in the trust at December 31, 2008.  PNM did not make any contributions
to the trust during the years ended December 31, 2008, 2007 or
2006.  Due to the minimal amount, TNMP makes monthly disbursements to
plan beneficiaries versus funding a trust.





B-79
 PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008, 2007 and 2006


The
following table presents information about prior service cost and net actuarial
loss in AOCI as of December 31, 2008.





PNM
      Plan
            
            
            TNMP
      PlanDecember
      31, 2008
            
            
            December
      31, 2008Prior
      service cost
            
            
            Net
      actuarial loss
            
            
            Net
      actuarial loss(In
      thousands)Amount
      in AOCI not yet recognized in net periodic cost (income) at beginning of
      year
            
            $
            2
            
            
            $
            182
            
            
            $
            -Experience
      loss (gain)
            
            
            -
            
            
            
            (555
            )
            
            
            (14
            )Regulatory
      asset (liability) adjustment
            
            
            -
            
            
            
            539
            
            
            
            14Amortization
      recognized in net periodic cost
            
            
            -
            
            
            
            (1
            )
            
            
            -Amount
      in AOCI not yet recognized in net periodic cost (income) at end of
      year
            
            $
            2
            
            
            $
            165
            
            
            $
            -Amortization
      expected to be recognized in AOCI in 2009
            
            $
            -
            
            
            $
            (1
            )
            
            $
            -





The
following table presents the components of net periodic cost recognized in the
Consolidated Statements of Earnings:








Pension
      BenefitsYear
      Ended December 31,2008
            
            
            2007
            
            
            2006(In
      thousands)PNM
      PlanService
      cost
            
            $
            56
            
            
            $
            57
            
            
            $
            55Interest
      cost
            
            
            1,136
            
            
            
            1,088
            
            
            
            1,055Amortization
      of net loss
            
            
            52
            
            
            
            93
            
            
            
            99Amortization
      of prior service cost
            
            
            13
            
            
            
            13
            
            
            
            13Net
      periodic benefit cost
            
            $
            1,257
            
            
            $
            1,251
            
            
            $
            1,222TNMP
      PlanService
      cost
            
            $
            -
            
            
            $
            -
            
            
            $
            -Interest
      cost
            
            
            75
            
            
            
            76
            
            
            
            76Amortization
      of actuarial loss
            
            
            -
            
            
            
            -
            
            
            
            -Amortization
      of prior service cost
            
            
            -
            
            
            
            -
            
            
            
            -Net
      periodic benefit cost
            
            $
            75
            
            
            $
            76
            
            
            $
            76





B-80
 PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008, 2007 and 2006


The
following significant weighted-average assumptions were used to determine the
projected benefit obligation and net periodic cost (income):





Year
      Ended December 31,PNM
      Plan
            
            2008
            
            
            2007
            
            
            2006Discount
      rate for determining projected benefit obligationat
      December 31
            
            
            7.25%
            
            
            
            6.88%
            
            
            
            6.10%Discount
      rate for determining net pension cost
            
            
            6.88%
            
            
            
            6.10%
            
            
            
            5.75%Long-term
      rate of return on plan assets
            
            
            N/A
            
            
            
            N/A
            
            
            
            N/ARate
      of compensation increase
            
            
            N/A
            
            
            
            N/A
            
            
            
            N/ATNMP
      PlanDiscount
      rate for determining projected benefit obligationat December 31
            
            
            7.25%
            
            
            
            6.72%
            
            
            
            6.10%Discount
      rate for determining net periodic cost
            
            
            6.72%
            
            
            
            6.10%
            
            
            
            5.75%Long-term
      rate of return on plan assets
            
            
            N/A
            
            
            
            N/A
            
            
            
            N/ARate
      of compensation increase
            
            
            N/A
            
            
            
            N/A
            
            
            
            N/A





The
assumed discount rate for determining the PBO was determined based on a review
of long-term high-grade bonds and management’s expectations. The change in
discount rate resulted in a decrease in the PNM and TNMP PBO of $0.5 million and
less than $0.1 million at December 31, 2008. Should actual experience differ
from actuarial assumptions, the projected benefit obligation and net periodic
cost would be affected.





The
following executive retirement plan payments, which reflect expected future
service, are expected:





PNM
            
            
            TNMPPlan
            
            
            Plan(In
      thousands)2009
            
            $
            1,455
            
            
            $
            1542010
            
            $
            1,438
            
            
            $
            1462011
            
            $
            1,421
            
            
            $
            1372012
            
            $
            1,403
            
            
            $
            1292013
            
            $
            1,383
            
            
            $
            120Years
      2014 – 2018
            
            $
            6,531
            
            
            $
            489





Other
Retirement Plans





PNMR
sponsors a 401(k) defined contribution plan for eligible employees, including
those of its subsidiaries.  PNMR’s contributions to the 401(k) plan
consist of a discretionary matching contribution equal to 75% of the first 6% of
eligible compensation contributed by the employee on a before-tax
basis.   PNMR also makes a non-matching contribution ranging from
3% to 10% of eligible compensation based on the eligible employee’s age. PNMR
contributed $19.7 million, $22.0 million, and $20.5 million in the years ended
December 31, 2008, 2007, and 2006.





PNMR also
provides executive deferred compensation benefits through an unfunded,
non-qualified plan. The purpose of this plan is to permit certain key employees
of PNMR who participate in the 401(k) defined contribution plan to defer
compensation and receive credits without reference to the certain limitations on
contributions. PNMR contributed $1.2 million, $1.4 million, and $1.4 million in
the years ended December 31, 2008, 2007, and 2006.  In December of
2008, an earlier version of this plan, which was frozen in 2004, was merged into
this plan.





B-81
 PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008, 2007 and 2006


(13)           Stock-Based
Compensation Plans





PNMR has
various types of stock-based compensation programs, including stock options,
restricted stock and performance shares granted under the Performance Equity
Plan (“PEP”).  All stock-based compensation is granted through
stock-based employee compensation plans maintained by PNMR.  Although
certain PNM and TNMP employees participate in the PNMR plans, PNM and TNMP do
not have separate employee stock-based compensation plans.





Performance
Stock Plan





PNMR’s
Performance Stock Plan (“PSP”) expired in December 2000.  The PSP was
a non-qualified stock option plan, covering a group of management
employees.  Options to purchase shares of PNMR’s common stock were
granted at the fair value of the shares at the close of business on the date of
the grant.  Although the authority to grant options under the PSP
expired on December 31, 2000, the options that were granted continue to be
effective according to their terms.





Performance
Equity Plan





The PEP
provides for the granting of non-qualified stock options, restricted stock
rights, performance shares performance units and stock appreciation rights to
officers, key employees and non-employee board members.  These options
vest ratably over three years from the grant date of the award.  The
total number of shares of PNMR common stock subject to all awards under the PEP
may not exceed 8.25 million, subject to adjustment under certain circumstances
defined in the PEP.  The number of shares of PNMR common stock subject
to the grant of restricted stock rights, performance shares and units and stock
appreciation rights is limited to 0.45 million shares.  Re-pricing of
stock options is prohibited unless specific shareholder approval is
obtained.





Source
of Shares





The
source of shares for exercised stock options, delivery of vested restricted
stock and performance shares is shares acquired on the open market, rather than
newly issued shares.





SFAS
123R





Effective
January 1, 2006, the Company adopted SFAS 123R, utilizing the modified
prospective approach.  Prior to the adoption of SFAS 123R, stock
option grants, performance shares and ESPP issuances were accounted for in
accordance with the intrinsic value method prescribed in APB 25, and
accordingly, no compensation expense was recognized for these
awards.  Restricted stock was also accounted for under APB 25 and
compensation expense was recognized for restricted stock awards prior to the
adoption of SFAS 123R.  “Restricted stock” is the name of these awards
provided for in the PEP and refers to awards of stock subject to
vesting.  It does not refer to restricted shares with contractual
post-vesting restrictions as defined in SFAS 123R.





Under the
modified prospective approach, SFAS 123R applies to all new awards and to awards
that were outstanding on January 1, 2006 that are subsequently modified,
repurchased or cancelled.  Compensation expense recognized after
January 1, 2006 includes compensation cost for all share-based payments granted
prior to, but not yet vested as of January 1, 2006, based on the grant-date fair
value estimated in accordance with the original provisions of SFAS 123 and
compensation expense for all share-based payments granted subsequent to January
1, 2006, based on the grant-date fair value estimated in accordance with the
provisions of SFAS 123R.  Prior periods were not restated to reflect
the impact of adopting the new standard.





The
unearned stock-based compensation related to stock options and restricted stock
awards is being amortized to compensation expense over the requisite vesting
period, which is generally equally over three years.  However, plan
provisions provide that upon retirement, participants become 100% vested in
stock options and restricted stock awards; therefore, in accordance with SFAS
123R, compensation expense for stock options and




B-82


PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008, 2007 and 2006




Total
compensation expense for stock-based payment arrangements recognized by PNMR for
the years ended December 31, 2008, 2007 and 2006 was $3.3 million, $7.6 million
and $7.5 million.  Of this total expense, $2.4 million, $6.1 million
and $5.7 million were charged to PNM and $0.6 million, $1.1 million and $1.3
million to TNMP.





PNMR
receives a tax deduction for certain stock option exercises during the period
the options are exercised, generally for the excess of the price at which the
options are sold over the exercise prices of the options and a tax deduction for
increases in the value of equity instruments issued under stock-based payment
arrangements.  In accordance with SFAS 123R, PNMR’s Consolidated
Statements of Cash Flows presentation reports the tax benefits from the exercise
of stock options and stock-based payments as financing cash flows.





At
December 31, 2008 PNMR had $1.5 million of unrecognized compensation expense
related to stock-based payments that is expected to be recognized over a
weighted-average period of 1.6 years.





Stock
Options





The
Company uses the Black-Scholes option pricing model to estimate the fair value
of stock-based awards with the following weighted-average assumptions for the
indicated periods:








2008
            
            
            2007
            
            
            2006Dividend
      yield
            
            
            6.99%
            
            
            
            3.02%
            
            
            
            3.33%Expected
      volatility
            
            
            28.33%
            
            
            
            18.68%
            
            
            
            21.70%Risk-free
      interest rates
            
            
            2.69%
            
            
            
            4.72%
            
            
            
            4.37%Expected
      life (years)
            
            
            4.2
            
            
            
            4.2
            
            
            
            4.1





The
assumptions above are based on multiple factors, including historical exercise
patterns of employees in relatively homogeneous groups with respect to exercise
and post-vesting employment termination behaviors, expected future exercising
patterns for these same homogeneous groups and both the implied and historical
volatility of PNMR’s stock price.





B-83
 PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008, 2007 and 2006


The
following table summarizes activity in stock option plans:





Weighted
            
            
            WeightedStock
            
            
            Average
            
            Aggregate
            AverageOption
            
            
            Exercise
            
            Intrinsic
            RemainingShares
            
            
            Price
            
            Value
            Contract
      LifeOutstanding
      at December 31, 2005
            
            
            3,016,549
            
            
            $
            18.97Granted
            
            
            817,200
            
            
            $
            24.07Exercised
            
            
            (720,711
            )
            
            $
            15.68Forfeited
            
            
            (113,432
            )
            
            $
            22.51Expired
            
            
            -
            
            
            
            -Outstanding
      at December 31, 2006
            
            
            2,999,606
            
            
            $
            21.02Granted
            
            
            766,400
            
            
            $
            30.47Exercised
            
            
            (442,252
            )
            
            $
            20.32Forfeited
            
            
            (40,177
            )
            
            $
            27.45Expired
            
            
            (18,679
            )
            
            $
            20.48Outstanding
      at December 31, 2007
            
            
            3,264,898
            
            
            $
            23.26Granted
            
            
            558,261
            
            
            $
            11.90Exercised
            
            
            (5,001
            )
            
            $
            16.13Forfeited
            
            
            (19,075
            )
            
            $
            26.49Expired
            
            
            (73,176
            )
            
            $
            22.04Outstanding
      at December 31, 2008
            
            
            3,725,907
            
            
            $
            21.54
            
            *
            6.35
      yearsExercisable
      at December 31, 2008
            
            
            2,650,949
            
            
            $
            21.96
            
            *
            4.27
      yearsOptions available for future
      grant**
            
            
            1,883,860





*  At
December 31, 2008, the exercise price of all outstanding stock options is
greater than the closing price of PNMR common stock on that date so the options
have no intrinsic value.


**    Includes
shares available for grants of restricted stock.





The
following table summarizes stock option activity for the years ended December
31:





Stock
      Options
            
            2008
            
            
            2007
            
            
            2006(In
      thousands,
              except
      per share amounts)Weighted-average
      grant date fair value of options granted
            
            $
            1.39
            
            
            $
            4.70
            
            
            $
            3.87Total
      fair value of options that vested during the period
            
            $
            4,003
            
            
            $
            4,670
            
            
            $
            3,338Total
      intrinsic value of options exercised during the period
            
            $
            15
            
            
            $
            4,931
            
            
            $
            8,465





Restricted
Stock





The PEP
allows for the issuance of restricted stock awards.  As noted above,
“restricted stock” is the name of these awards provided for in the PEP and
refers to awards of stock subject to vesting.  It does not refer to
restricted shares with contractual post-vesting restrictions as defined in SFAS
123R.  The compensation expense for these awards was determined based
on the market price of PNMR stock on the date of grant reduced by the present
value of future dividends applied to the total number of shares that were
anticipated to fully vest and then amortized over the vesting
period.


B-84
 PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008, 2007 and 2006


The
Company estimates the fair value of restricted stock awards based on the market
price of PNMR common stock on the date of grant reduced by the present value of
estimated future dividends with the following weighted-average assumptions for
the indicated periods:





2008
            
            
            2007
            
            
            2006Expected
      quarterly dividends per share
            
            $
            0.23
            
            
            $
            0.23
            
            
            $
            0.20Risk-free
      interest rate
            
            
            2.93%
            
            
            
            4.71%
            
            
            
            4.64%





The
following table summarizes nonvested restricted stock activity for the year
ended December 31, 2008:





Weighted-AverageGrant-DateNonvested
      Restricted Stock
            
            Shares
            
            
            Fair
      ValueNonvested
      at beginning of period
            
            
            183,757
            
            
            $
            26.09Granted
            
            
            129,250
            
            
            $
            11.50Vested
            
            
            (112,376
            )
            
            $
            21.05Forfeited
            
            
            (5,005
            )
            
            $
            26.44Nonvested
      at end of period
            
            
            195,626
            
            
            $
            17.43





The
following table summarizes restricted stock activity for the year ended December
31:





Nonvested
      Restricted Stock
            
            2008
            
            
            2007
            
            
            2006(In
      thousands,
              except
      per share amounts)Weighted-average
      grant date fair value of shares granted
            
            $
            11.50
            
            
            $
            28.79
            
            
            $
            24.11Total
      fair value of shares that vested during the period
            
            $
            2,365
            
            
            $
            1,961
            
            
            $
            992





ESPP





Under the
ESPP, employees were allowed to purchase shares of PNMR’s common stock at a 15%
discount of the lower of the market price of stock at the beginning of the
offering period and end of each purchase period for the six months ended June
30, 2006.  Under the provisions of SFAS 123R, the compensation expense
for the shares issued under the ESPP was determined based on the fair value of
PNMR’s common stock using the Black-Scholes model.  Beginning July 1,
2006, the discount rate was changed to 5%, and the look-back feature was
eliminated; therefore, the plan is no longer considered
compensatory.





The ESPP
has been authorized to issue up to 550,000 new shares of PNMR common stock.
Under the ESPP, 92,224, 55,885, and 85,089 were issued during the years ended
December 31, 2008, 2007, and 2006.  The source of shares for the ESPP
is primarily new issued shares.





(14)
              Construction
      Program and Jointly-Owned Electric Generating
  Plants





Joint
Projects





PNMR’s
construction expenditures for 2008 were $345.0 million, including expenditures
on PNM’s jointly-owned projects and including $36.8 million for PNM
Gas.  TNMP does not participate in the ownership or operation of any
generating plants, but incurred construction expenditures of $51.1 million
during 2008.





B-85
 PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008, 2007 and 2006


PNM’s
construction expenditures for 2008 were $277.1 million, including expenditures
on jointly-owned projects.  Under the agreements for the jointly-owned
projects, PNM has an undivided interest in each asset and liability of the
project and records its pro-rata share of each item in the corresponding asset
and liability account on PNM’s Consolidated Balance Sheets.  Likewise,
PNM records its pro-rata share of each item of operating and maintenance
expenses for its jointly-owned plants within the corresponding operating expense
account in its Consolidated Statements of Earnings.





At
December 31, 2008, PNM’s interests and investments in jointly-owned generating facilities
are:





Station (Fuel Type)
            
            Plant
      inService
            
            Accumulated
      Depreciation
            
            Construction
              Work
      in
              Progress
            
            Composite
              Interest(In
      thousands)SJGS
      (Coal)
            $869,164
            
            $423,176
            
            $48,802
            
            46.30%PVNGS
      (Nuclear) *
            323,750
            
            95,532
            
            34,523
            
            10.20%Four
      Corners Units 4 and 5 (Coal)
            132,635
            
            102,438
            
            13,380
            
            13.00%Luna
      (Gas)
            49,832
            
            5,990
            
            3,374
            
            33.33%





*
Includes interest in PVNGS Unit 3, interest in common facilities for all PVNGS
units and owned interests in PVNGS Units 1 and 2.





San
Juan Generating Station





PNM
operates and jointly owns the SJGS.  SJGS Units 1 and 2 are owned on a
50% shared basis with Tucson.  SJGS Unit 3 is owned 50% by PNM, 41.8%
by SCPPA, and 8.2% by Tri-State.  SJGS Unit 4 is owned 38.457% by PNM,
28.8% by M-S-R Public Power Agency, 10.04% by the City of Anaheim, California,
8.475% by the City of Farmington, New Mexico, 7.2% by the County of Los Alamos,
New Mexico, and 7.028% by UAMPS.





Palo
Verde Nuclear Generating Station





PNM is a
participant in the three units of PVNGS, also known as the Arizona Nuclear Power
Project, with APS (the operating agent), SRP, EPE, SCE, SCPPA and The Department
of Water and Power of the City of Los Angeles.  PNM has a 10.2%
undivided interest in PVNGS, with portions of its interests in Units 1 and 2
held under leases.





Operation
of each of the three PVNGS units requires an operating license from the
NRC.  The NRC issued full power operating licenses for Unit 1 in June 1985,
Unit 2 in April 1986 and Unit 3 in November 1987.  The full power operating
licenses are valid for a period of approximately 40 years.  APS, on behalf
of the PVNGS participants, applied for renewed operating licenses for each unit
on December 15, 2008 for a period of 20 years beyond the expirations of the
current licenses.  The NRC is currently reviewing the application. The
PVNGS participants do not anticipate any problems renewing these
licenses.  However, as a result of potential terrorist threats and
increased public scrutiny of utilities, the licensing process could result in
increased licensing or compliance costs that are difficult or impossible to
predict.





Four
Corners Power Plant





PNM is a
participant in two units of Four Corners with APS (the operating agent), EPE,
SRP, SCE, and Tucson.  PNM has a 13.0% undivided interest in Units 4
and 5 of Four Corners.





Luna
Energy Facility





Luna is a
combined-cycle power plant near Deming, New Mexico.  Luna is owned
33.3% by PNM, 33.3% by Tucson and 33.3% by Phelps Dodge.  Luna is
operating as a PNM wholesale facility and PNM’s 190-megawatt




B-86


PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008, 2007 and 2006





Construction
Program





The
Company anticipates making substantial capital expenditures for the construction
and acquisition of utility plant and other property and equipment.  A
summary of the budgeted construction expenditures, including expenditures for
jointly-owned projects and nuclear fuel, is as follows:








2009
            
            
            2010
            
            
            2011
            
            
            2012
            
            
            2013
            
            
            Total(In
      millions)PNM
            
            $
            227.2
            
            
            $
            214.9
            
            
            $
            190.4
            
            
            $
            186.5
            
            
            $
            159.7
            
            
            $
            978.7TNMP
            
            
            61.6
            
            
            
            79.7
            
            
            
            79.1
            
            
            
            64.4
            
            
            
            54.1
            
            
            
            338.9Other
            
            
            16.0
            
            
            
            11.6
            
            
            
            12.2
            
            
            
            11.9
            
            
            
            17.2
            
            
            
            68.9Total
      PNMR
            
            $
            304.8
            
            
            $
            306.2
            
            
            $
            281.7
            
            
            $
            262.8
            
            
            $
            231.0
            
            
            $
            1,386.5





Budgeted
construction expenditures of $2.0 million for PNM Gas prior to it being sold on
January 30, 2009 are included in the 2009 amount above.





(15)
              Asset
      Retirement Obligations





The ARO
is recorded in accordance with SFAS 143 and is based on the determination of
underlying assumptions, such as the Company’s discount rate, estimates of the
future costs for decommissioning and the timing of the removal activities to be
performed.  Any changes in these assumptions underlying the required
calculations may require revisions to the estimated ARO when
identified.  A reconciliation of ARO is as follows:





PNMR
            
            
            PNM
            
            
            TNMP(In
      thousands)Liability
      at December 31, 2005
            
            $
            55,646
            
            
            $
            54,940
            
            
            $
            639Liabilities
      incurred
            
            
            832
            
            
            
            751
            
            
            
            -Liabilities
      settled
            
            
            (7
            )
            
            
            -
            
            
            
            (7
            )Accretion
      expense
            
            
            4,867
            
            
            
            4,802
            
            
            
            54Liability
      at December 31, 2006
            
            
            61,338
            
            
            
            60,493
            
            
            
            686Liabilities
      incurred
            
            
            204
            
            
            
            205
            
            
            
            -Liabilities
      settled
            
            
            (8
            )
            
            
            -
            
            
            
            (8
            )Accretion
      expense
            
            
            5,204
            
            
            
            5,142
            
            
            
            52Asset transferred with TNMP New Mexico asset transfer to
    PNM
            
            
            -
            
            
            
            68
            
            
            
            (68
            )Asset transferred with Twin Oaks contribution to Optim
    Energy
            
            
            (89
            )
            
            
            -
            
            
            
            -Liability
      at December 31, 2007 (1)
            
            
            66,649
            
            
            
            65,908
            
            
            
            662Liabilities incurred
            
            
            548
            
            
            
            548
            
            
            
            -Liabilities settled
            
            
            (49
            )
            
            
            (42
            )
            
            
            (7
            )Accretion expense
            
            
            4,928
            
            
            
            4,866
            
            
            
            56Revisions to estimated cash flows(2)
            
            
            (8,401
            )
            
            
            (8,401
            )
            
            
            -Liability
      at December 31, 2008(1)
            
            $
            63,675
            
            
            $
            62,879
            
            
            $
            711





(1)ARO
      for PNMR and PNM includes $0.2 million and $0.2 million at December 31,
      2008 and 2007 for gas operations, which is reflected as discontinued
      operations.


(2)Based
      on studies to estimate amount and timing of future ARO
      expenditures.




B-87


PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008, 2007 and 2006


(16)
              Commitments
      and Contingencies





Overview





There are
various claims and lawsuits pending against the Company.  The Company
is also subject to federal, state and local environmental laws and regulations,
and is currently participating in the investigation and remediation of numerous
sites.  In addition, the Company periodically enters into financial
commitments in connection with its business operations.  It is not
possible at this time for the Company to determine fully the effect of all
litigation and other legal proceedings on its results of operations or financial
position.  It is the Company’s policy to accrue for expected costs in
accordance with SFAS 5, when it is probable that a liability has been incurred
and the amount of expected costs of these items to be incurred is reasonably
estimable.  The Company is also involved in various legal proceedings
in the normal course of its business.  The legal costs for these
matters are accrued when the legal expenses are incurred.  The Company
does not expect that any known lawsuits, environmental costs and commitments
will have a material adverse effect on its financial condition, results of
operations or cash flows, although the outcome of litigation, investigations and
other legal proceedings is inherently uncertain.





Commitments
and Contingencies Related to the Environment





Renewable
Portfolio Standard





The
Renewable Energy Act of 2004 was enacted to encourage the development of
renewable energy in New Mexico.  The act, as amended, establishes a
mandatory renewable energy portfolio standard requiring a utility to acquire a
renewable energy portfolio equal to 5% of retail electric sales by January 1,
2006, increasing to 10% by 2011, 15% by 2015 and 20% by 2020.  The
NMPRC requires renewable energy portfolios to be “fully diversified” beginning
in 2011 when no less than 20% of the renewable portfolio requirement must be met
by wind energy, no less than 20% by solar energy, no less than 10% by other
renewable technologies, and no less than 1.5% by distributed generation. The act
provides for streamlined proceedings for approval of utilities’ renewable energy
procurement plans, assures utilities recovery of costs incurred consistent with
approved procurement plans and requires the NMPRC to establish a reasonable cost
threshold for the procurement of renewable resources to prevent excessive costs
being added to rates. The NMPRC has established a reasonable cost threshold that
began at 1 percent of all customers’ aggregated overall annual electric charges,
increasing by 0.2 percent annually until 2011, at which time it will be 2
percent, and then increasing by 0.25 percent annually until reaching 3 percent
in 2015.





In
December 2008, PNM received approval of its renewable energy procurement plan
for 2009.  Costs incurred under the NMPRC-approved plan are authorized
to be included for recovery in a future rate proceeding.  The approved
plan includes: (1) approval to continue PNM’s program for purchasing RECs from
customers with photovoltaic (“PV”) distributed generation systems sized no
larger than 10 kW at a price of $0.13 per REC per kWh generated beyond the
previously authorized budget and cost recovery in order to avoid a suspension of
the program in early 2010; (2) approval to implement a program to acquire RECs
from customers with PV systems sized greater than 10 kW and up to 1 MW at a
price of $0.15 per REC per kWh generated and for cost recovery; and (3) approval
to supplement the plan to seek approval of any new projects that result from two
RFPs  that PNM issued in 2008 for renewable resources.  One
of the RFPs, joint with two other electric providers, is for a concentrated
solar power project using solar parabolic trough technology that would be
located in New Mexico.  The second RFP was for renewable energy in
general.  PNM’s 2009 renewable energy procurement plan also
reported termination of the biomass project described below and indicated that
PNM may need additional resources to meet the renewable energy portfolio
standard requirement for 2010 and the diversity requirements for
2011.  In December 2008, the NMPRC issued a final order approving the
renewable energy plan. However, the price for RECs acquired from larger systems
was increased to $0.15 per kWh.





B-88
 PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008, 2007 and 2006


PVNGS
Decommissioning Funding





PNM has a
program for funding its share of decommissioning costs for PVNGS. The nuclear
decommissioning funding program is invested in equities and fixed income
instruments in qualified and non-qualified trusts.





PNM
provided an additional $3.5 million, $7.9 million, and $4.3 million funding for
the years ended December 31, 2008, 2007 and 2006   into the
qualified and non-qualified trust funds.  The estimated market value
of the trusts at December 31, 2008 and 2007 was $111.7 million and $139.6
million.





Nuclear
Spent Fuel and Waste Disposal





Nuclear
power plant operators are required to enter into spent fuel disposal contracts
with the DOE, and the DOE is required to accept and dispose of all spent nuclear
fuel and other high-level radioactive wastes generated by domestic power
reactors.  Although the Nuclear Waste Policy Act required the DOE to
develop a permanent repository for the storage and disposal of spent nuclear
fuel by 1998, the DOE has announced that the repository cannot be completed
before at least 2017.  In November 1997, the United States Court of
Appeals for the District of Columbia Circuit issued a decision preventing the
DOE from excusing its own delay, but refused to order the DOE to begin accepting
spent nuclear fuel.  Based on this decision and the DOE’s delay, a
number of utilities, including APS (on behalf of itself and the other PVNGS
owners including PNM), filed damages actions against the DOE in the Court of
Federal Claims and is currently pursuing that damages claim. In August
2008, the United States Court of Appeals for the Federal Circuit issued
decisions in three damages actions brought by other nuclear utilities that could
result in a decrease in the amount of PNM’s recoverable damages; however,
additional appeals in those actions are possible and APS continues to monitor
the status of those actions.  The trial in the APS matter began on
January 28, 2009.  Testimony and evidence have been presented by both
sides.  The trial court has set a post-trial briefing schedule and is
expected to hear closing arguments in the early summer of 2009.  PNM
currently estimates that it will incur approximately $46.1 million (in 2007
dollars) over the life of PVNGS for its share of the fuel costs related to the
on-site interim storage of spent nuclear fuel during the operating life of the
plant.  PNM accrues these costs as a component of fuel expense,
meaning that the charges are accrued as the fuel is burned.  During
the years ended December 31, 2008, 2007 and 2006, PNM incurred expense of $1.4
million, $1.3 million, $1.2 million.  At December 31, 2008 and 2007,
PNM had $14.5 million recorded as a liability on its Consolidated Balance Sheets
for interim storage costs.





The
Clean Air Act





Regional
Haze





In 1999,
the EPA announced final regional haze rules and in 2005, the EPA issued the
final rule addressing regional haze and guidelines for BART determinations. The
rule calls for all states to establish goals and emission reduction strategies
for improving visibility in national parks and wilderness areas.  In
October 2006, the EPA issued the final BART alternatives rule which made
revisions to the 2005 regional haze rules.  In particular, the
alternatives rule defines how an SO2 emissions
trading program developed by the Western Regional Air Partnership, a voluntary
organization of western states, tribes and federal agencies, can be used by
western states.  New Mexico will be participating in the SO2 program,
which is a trading program that will be implemented if SO2 reduction
milestones, which are still being developed, are not met.





In
November 2006, the NMED requested a BART analysis for NOX and particulates for
each of the four units at SJGS.  PNM submitted the analysis to the
NMED in early June 2007, recommending against installing additional pollution
control equipment on any of the SJGS units beyond those currently being
installed.  The NMED is presently reviewing the
analysis.  Potentially, additional NOX emission reductions could be
required.  The nature and cost of compliance with these potential
requirements cannot be determined at this time.





B-89


PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008, 2007 and 2006





While the
Company continues to monitor these matters, at the present time, the Company
cannot predict whether the agencies will agree with either PNM’s or APS’ BART
recommendations. If the agencies disagree with those recommendations for
SJGS or Four Corners, the Company cannot predict the nature of the BART controls
the agencies may ultimately mandate or the resulting financial or operational
impact.





New
Source Review Rules





In 2003,
the EPA issued a rule clarifying what constitutes routine maintenance, repair,
and replacement of damaged or worn equipment, subject to safeguards to assure
consistency with the Clean Air Act.  In March 2006, a panel of the
U.S. Court of Appeals for the District of Columbia Circuit vacated this
rule.  The action by the court did not eliminate the NSR exclusion for
routine maintenance, repair, and replacement work nor did the decision rule on
what activities are physical changes.  In April 2007, the U.S. Supreme
Court issued a decision precluding the use of an increase in the maximum hourly
emission rate for determining an emissions increase for PSD
purposes.  The decision did not preclude the EPA from promulgating a
regulation allowing an emission increase test for PSD purposes to be based on an
increase in the maximum hourly emission rate.  The EPA issued a
proposed revision of the NSR rules to specify that only activities that increase
an emitting unit’s hourly rate of emissions trigger a major
modification.  The EPA announced in December 2008 that the EPA would
not be finalizing this proposed revision to the NSR rules during the Bush
administration and it appears unlikely that the new administration will act on
this matter.  The Company is unable to determine the impact of this
matter on its results of operations and financial position.





Citizen
Suit Under the Clean Air Act





PNM
reached an impasse with the Grand Canyon Trust and Sierra Club and with the NMED
with respect to certain matters under a consent decree of May 10, 2005. 
The controversies related to PNM’s reports on NOX controls and demisters at
SJGS.  PNM and the other parties reached an agreement concerning these
issues, which was set forth in a stipulated order entered by the court approving
the settlement on December 27, 2006.





The
consent decree includes a provision whereby stipulated penalties are assessed
for non-compliance with specified emissions limits.  Stipulated
penalty amounts are placed in escrow on a quarterly basis pending review of
SJGS’s emissions performance for each quarter.  As of December 31,
2008, PNM’s share of the total amount of stipulated penalties was $3.4 million,
which has been deposited into the escrow account.





Ozone
Non-Attainment





The NMED
recently published its draft recommendation of area designations for the 2008
revised ozone national ambient air quality standard.  The draft is
recommending that San Juan County, New Mexico be designated as non-attainment
for ozone.  SJGS is situated in San Juan County.  The NMED
will submit its final recommendation to the EPA by March 12,
2009.  EPA will make a final designation for the status of San Juan
County in March 2010.  The Company does not know if additional NOX
controls will be required as a result of the ozone non-attainment
designation.





B-90


PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO
POWER COMPANY AND
SUBSIDIARIES
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008, 2007 and 2006


Navajo
Nation Environmental Issues





Four
Corners is located on the Navajo Reservation and is held under an easement
granted by the federal government as well as a lease from the Navajo
Nation.  The Navajo Acts, enacted in 1995 by the Navajo Nation,
purport to give the Navajo Nation EPA authority to promulgate regulations
covering air quality, drinking water, and pesticide activities, including those
activities that occur at Four Corners.  In October 1995, the Four
Corners participants filed a lawsuit in the District Court of the Navajo Nation,
Window Rock District, challenging the applicability of the Navajo Acts as to
Four Corners.  The District Court stayed these proceedings pursuant to
a request by the parties and the parties are seeking to negotiate a
settlement.





In 2000,
the Navajo Tribal Council approved operating permit regulations under the Navajo
Nation Air Pollution Prevention and Control Act.  The Four Corners
participants believe that the regulations fail to recognize that the Navajo
Nation did not intend to assert jurisdiction over Four Corners.  Each
of the Four Corners participants filed a petition with the Navajo Nation Supreme
Court for review of the operating permit regulations.  Those
proceedings have been stayed, pending the outcome of the settlement negotiations
mentioned above.





In May
2005, APS and the Navajo Nation signed a Voluntary Compliance Agreement (“VCA”)
resolving the dispute regarding the Navajo Nation Air Pollution Prevention and
Control Act portion of the lawsuit.  On March 21, 2006, the EPA
determined that the Navajo Nation was eligible for “treatment as a state” for
the purpose of entering into a supplemental delegation agreement with the EPA to
administer the Clean Air Act Title V, Part 71 federal permit program over Four
Corners.  The EPA entered into the supplemental delegation agreement
with the Navajo Nation on the same day.  Because the EPA’s approval
was consistent with the requirements of the VCA, APS sought dismissal of the
pending litigation in the Navajo Nation Supreme Court, as well as the pending
litigation in the Navajo Nation District Court to the extent the claims relate
to the Clean Air Act, and the Courts have dismissed the claims accordingly. The
agreement does not address or resolve any dispute relating to other aspects of
the Navajo Acts.





The
Company cannot currently predict the outcome of these matters.





Four
Corners Federal Implementation Plan Litigation





On April
30, 2007, the EPA adopted a source specific FIP to set air quality standards at
Four Corners.  The FIP essentially federalizes the requirements
contained in the New Mexico State Implementation Plan, which Four Corners has
historically followed.  The FIP also includes a requirement to
maintain and enhance dust suppression methods.  APS filed a petition
for review in the U.S. District Court of Appeals for the Tenth Circuit seeking
revisions to the FIP to clarify certain requirements and allow operational
flexibility.  The Sierra Club intervened in this action and with other
parties filed a petition for review with the same court challenging the FIP’s
compliance with the Clean Air Act.  APS intervened in that
action.  In APS’ lawsuit, APS challenges two key provisions of the
FIP:  a 20% opacity limit on certain fugitive dust emissions, which
the EPA filed a motion to remand and vacate in early December 2007, and a 20%
stack opacity limit on Units 4 and 5.  Briefing in this case is now
complete, and oral arguments as requested by the EPA were completed in May
2008.  After briefing was completed, the EPA voluntarily moved to
vacate the fugitive dust provisions of the FIP.  The court has not yet
ruled on that motion; however, in light of that motion, APS asked for, and the
EPA granted, an administrative stay of the fugitive dust provisions, and the
Navajo Nation environmental protection agency amended the Four Corners
permit to specify that those requirements do not apply unless and until the
court denies the EPA’s motion.Although
the Company cannot predict the outcome or the timing of these matters, the
Company does not believe that they will have a material adverse impact on the
Company’s financial position, results of operations or cash flows.





Santa
Fe Generating Station





PNM and
the NMED conducted investigations of gasoline and chlorinated solvent
groundwater contamination detected beneath the site of the former Santa Fe
Generating Station to determine the source of the contamination pursuant to a
1992 settlement agreement between PNM and the NMED.





B-91


PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008, 2007 and 2006





The
Superfund Oversight Section of the NMED has conducted multiple investigations
into the chlorinated solvent plume in the vicinity of the site of the former
Santa Fe Generating Station.   In February 2008, a NMED site
inspection report was submitted to the EPA, which states that neither the source
nor extent of contamination has been determined and also states that the source
may not be the former Santa Fe Generating Station.  The NMED
investigation is ongoing.  The Company is unable to predict the
outcome of this matter.





Coal
Combustion Waste Disposal





SJCC
currently disposes of coal combustion products (“CCPs”) consisting of fly ash,
bottom ash, and gypsum from SJGS in the surface mine pits adjacent to the
plant.  The Office of Surface Mining is in the process of developing
revisions to the Surface Mining Control and Reclamation Act (“SMCRA”) that would
specifically address the placement of CCPs in surface mines.  PNM
understands that these revisions do not represent a major overhaul of the SMCRA
regulations and will continue to support the mine placement of
CCPs.





EPA is
currently working on a Notice of Data Availability on the placement of CCPs in
surface impoundments and landfill.  This notice allows additional data
and information to be collected and could cause EPA to revisit its current
regulations on the disposal of CCPs in surface impoundments or
landfill.  PNM cannot predict the outcome of this matter but does not
believe currently that it will have a material adverse impact on its results of
operations or financial position, because the majority of the CCPs from SJGS are
placed in the mine and not surface impoundments or landfills.





Gila
River Indian Reservation Superfund Site





In April
2008, the EPA informed PNM that it may be a PRP in the Gila River Indian
Reservation Superfund Site in Maricopa County, Arizona.  PNM, along
with SRP, APS and EPE, owns a parcel of property on which a transmission pole
and a portion of a transmission line are located.  The property abuts
the Gila River Indian Community boundary and, at one time, may have been part of
an airfield where crop dusting took place.  Currently, the EPA is only
seeking payment from PNM and other PRPs for past cleanup-related costs involving
contamination from the crop dusting.  Based upon the total amount of
cleanup costs reported by the EPA in its letter to PNM, the resolution of this
matter is not expected to have a material adverse impact on PNM’s financial
position, results of operations, or cash flows.





Other
Commitments and Contingencies





Coal
Supply





Twin
Oaks





Altura is
the owner of Twin Oaks, a coal-fired power plant, which is being supplied by a
long-term coal supply agreement.  Altura is not responsible under this
agreement for the decommissioning or reclamation costs of this
mine.  PNMR originally guaranteed Altura’s performance under this
agreement.  On June 1, 2007, when PNMR contributed its ownership
interest of Altura to Optim Energy, the guarantee obligation of PNMR was
released.





B-92


PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO
POWER COMPANY AND
SUBSIDIARIES
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008, 2007 and 2006


PNM





The coal
requirements for SJGS are being supplied by SJCC, a wholly owned subsidiary of
BHP Billiton.  SJCC holds certain federal, state and private coal
leases under an underground coal sales agreement pursuant to which it will
supply processed coal for operation of the SJGS through 2017.  The
coal agreement is a cost plus contract.  SJCC is reimbursed for all
costs for mining and delivering the coal plus an allocated portion of
administrative costs.  In addition, SJCC receives a return on its
investment.  BHP Minerals International, Inc. has guaranteed the
obligations of SJCC under the coal agreement.  The coal agreement
contemplates the delivery of approximately 61 million tons of coal during its
remaining term, which would supply substantially all the requirements of the
SJGS through approximately 2017.  The coal agreement replaced two
surface mining operations with a single underground mine located adjacent to the
plant.





APS
purchases all of Four Corners’ coal requirements from a supplier with a
long-term lease of coal reserves with the Navajo Nation.  The Four
Corners coal contract runs through 2016, with options on APS’ part to extend the
contract for five to fifteen additional years.  The Four Corners plant
site is leased from the Navajo Nation and is also subject to an easement from
the federal government.





In 2003,
PNM completed a comprehensive review of the final reclamation costs for both the
surface mines that previously provided coal to SJGS and the current underground
mine providing coal.  Based on this study, PNM revised its estimates
of the final reclamation of the surface mine.  In addition, the mining
contract for Four Corners has been renewed until 2016 and the estimate
for decommissioning the Four Corners mine was also revised.  Based on
the most recent estimates, the final cost of surface mine reclamation is
expected to be $130.5 million in future dollars excluding contract buyout costs
paid to SJCC.  During the year ended December 31, 2008, 2007 and 2006,
PNM made payments of $12.7 million, $11.4 million, and $11.6 million against
this liability.  As of December 31, 2008, and 2007, $33.8 million and
$41.2 million was recognized on PNM’s Consolidated Balance Sheet for the
obligation for surface mine reclamation using the fair value method to determine
the liability.  At December 31, 2008 and 2007, the balance on PNM’s
Consolidated Balance Sheets for the reclamation liability related to underground
mining activities was $1.6 million and $1.2 million.





In 2003,
the NMPRC granted PNM permission to collect as a part of its rates up to $100.0
million of surface mine final reclamation costs.  In the 2007 Electric
Rate Case, PNM requested recovery of increased surface mine decommissioning
costs, as well as underground mine reclamation costs. Recovery of the final
underground mine reclamation costs was allowed, however, the NMPRC denied
recovery of amounts for surface mine decommissioning in excess of $100.0
million. PNM has filed an appeal of this issue in the New Mexico Supreme
Court.  See Note 17.  The Company cannot predict the outcome
of this appeal.





PVNGS
Liability and Insurance Matters





The PVNGS
participants have insurance for public liability resulting from nuclear energy
hazards to the full limit of liability under federal law.  This
potential liability is covered by primary liability insurance provided by
commercial insurance carriers in the amount of $300 million and the balance by
an industry-wide retrospective assessment program.  If losses at any
nuclear power plant covered by the program exceed the accumulated funds, PNM
could be assessed retrospective premium adjustments.  The maximum
assessment per reactor under the program for each nuclear incident is $117.5
million, subject to an annual limit of $17.5 million per incident, to be
periodically adjusted for inflation.  Based on PNM’s 10.2% interest in
the three PVNGS units, PNM’s maximum potential assessment per incident for all
three units is $36.0 million, with an annual payment limitation of $5.4
million.





The PVNGS
participants maintain “all risk” (including nuclear hazards) insurance for
property damage to, and decontamination of, property at PVNGS in the aggregate
amount of $2.75 billion, a substantial portion of which must first be applied to
stabilization and decontamination.  The participants have also secured
insurance against portions of any increased cost of generation or purchased
power and business interruption resulting from a sudden and unforeseen
accidental outage of any of the three units.  The property damage,
decontamination, and replacement




B-93


PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008, 2007 and 2006





Natural
Gas Supply





PNM Gas
contracted for the purchase of gas primarily to serve its retail
customers.  The majority of these contracts were short-term in nature,
supplying the gas needs for the current heating season and the following
off-season months.  The price of gas was a pass-through, whereby PNM
recovered 100% of its cost of gas.  There was also occasion for PNM
Gas to purchase gas to source off-system sales.  As discussed in Note
2, PNM completed the sale of PNM Gas on January 30, 2009 at which time all
commitments for PNM Gas future gas purchases were assumed by the
buyer.





PNM
Electric procures gas supplies for its power plants from third-party sources and
contracts with third party transportation providers and PNM Gas (through January
29, 2009 and thereafter with NMGC).





Water
Supply





Because
of New Mexico’s arid climate and current drought conditions, there is a growing
concern in New Mexico about the use of water for power plants.  PNM
has secured water rights in connection with the existing plants at Afton, Luna
and Lordsburg.  Water availability does not appear to be an issue for
these plants at this time.





The “four
corners” region of New Mexico, in which SJGS and Four Corners are located,
experienced drought conditions during 2002 through 2004 that could have affected
the water supply for PNM’s generation plants.  In future years, if
adequate precipitation is not received in the watershed that supplies the four
corners region, the plants could be impacted.  Consequently, PNM, APS
and BHP Billiton have undertaken activities to secure additional water supplies
for SJGS, Four Corners and related mines.  PNM has reached an
agreement for a voluntary shortage sharing agreement with tribes and other water
users in the San Juan Basin for a term ending December 31,
2012.  Further, PNM and BHP Billiton have reached agreement on a
long-term supplemental contract relating to water for SJGS with the Jicarilla
Apache Nation that ends in 2016.  APS and BHP have entered into a
similar contract for Four Corners.    Although the Company
does not believe that its operations will be materially affected by the drought
conditions at this time, it cannot forecast the weather situation or its
ramifications, or how regulations and legislation may impact the Company’s
situation in the future, should the shortages occur in the future.





PVNGS
Water Supply Litigation





A summons
was served on APS in 1986 that required all water claimants in the Lower Gila
River Watershed of Arizona to assert any claims to water on or before January
20, 1987, in an action pending in the Maricopa County Superior
Court.  PVNGS is located within the geographic area subject to the
summons.  APS’ rights and the rights of the other PVNGS participants
to the use of groundwater and effluent at PVNGS are potentially at issue in this
action.  APS filed claims that dispute the court’s jurisdiction over PVNGS’
groundwater rights and their contractual rights to effluent relating to PVNGS
and, alternatively, seek confirmation of those rights.  In 1999, the
Arizona Supreme Court issued a decision finding that certain groundwater rights
may be available to the federal government and Indian tribes.  In
addition, the Arizona Supreme Court issued a decision in 2000 affirming the
lower court’s criteria for resolving groundwater claims.  Litigation
on both these issues has continued in the trial court.  No trial dates
have been set in these matters.  PNM does not expect that this
litigation will have a material adverse impact on its results of operation or
financial position.





NRC
Matters





Because
of several NRC findings relating to situations at PVNGS Unit 3 in 2004 and 2006,
the NRC placed PVNGS Unit 3 on an enhanced NRC inspection regime in
2007.  Since then, APS management has been conducting




B-94


PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008, 2007 and 2006





San
Juan River Adjudication





In 1975,
the State of New Mexico filed an action entitled “State of New Mexico v. United
States, et al.”, in the District Court of San Juan County, New Mexico, to
adjudicate all water rights in the San Juan River Stream System.  The
Company was made a defendant in the litigation in 1976.  The action is
expected to adjudicate water rights used at Four Corners and at
SJGS.  In 2005, the Navajo Nation and various parties announced a
settlement of the Nation’s reserved surface water rights.  Federal
legislation and certain approvals will be required to implement the
settlement.  The Company cannot determine the effect, if any, of any
water rights adjudication on the present arrangements for water at SJGS and Four
Corners.  Final resolution of the case cannot be expected for several
years. The Company is unable to predict the ultimate outcome of this
matter.





Conflicts
at San Juan Mine Involving Oil and Gas Leaseholders





SJCC,
through leases with the federal government and the State of New Mexico, owns
coal interests with respect to the San Juan underground mine.  Certain
gas producers have leases in the area of the underground coal mine and have
asserted claims against SJCC that its coal mining activities are interfering
with gas production.  SJCC has reached settlement with several gas
leaseholders and has other potential claimants.  PNM cannot predict
the outcome of any future disputes between SJCC and other gas
leaseholders.





Right
of Way Matters





Many of
PNM’s electric transmission and distribution facilities are located on lands
that require the grant of rights-of-way from governmental entities, Native
American tribes, or private parties.  Several of the agreements
granting the rights-of-way may have expired or may expire within the next few
years.  PNM is actively reviewing these matters and negotiating with
certain parties, as appropriate, for the renewal of these
rights-of-way.  However, there can be no assurance that all of these
rights-of-way will be renewed.  If PNM is not successful in renewing
the rights-of-way on Native American lands, it could be forced to remove its
facilities from or abandon its facilities on the property covered by the
rights-of-way and seek alternative routes for its transmission or distribution
facilities.  With respect to non-tribal government land and private
land, PNM may have condemnation rights. If rights-of-way are renewed, they may
be renewed at prices that are higher than historical levels, based on current
renewal experience.  Rights-of-way costs have historically been
recovered in rates charged to customers.  PNM will seek to recover
such costs in future rates.





Republic
Savings Bank Litigation





In 1992,
Meadows Resources, Inc. (“MRI”), an inactive subsidiary of PNMR, and its
subsidiaries (“Plaintiffs”) filed suit against the Federal government in the
United States Court of Claims, alleging breach of contract arising from the
seizure of Republic Savings Bank (“RSB”).  RSB was seized and
liquidated after Federal legislation prohibited certain accounting practices
previously authorized by contracts with the Federal government.  The
Federal government filed a counterclaim alleging breach of obligation to
maintain RSB’s net worth and moved to dismiss Plaintiffs’ claims for lack of
standing.





Plaintiffs
filed a motion for summary judgment in December 1999 on the issue of liability
and on the issue of damages.  The Federal government filed a cross
motion for summary judgment and opposed Plaintiffs’s motion.





B-95


PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008, 2007 and 2006





The
matter is currently pending before the U. S. Court of Appeals for the Federal
Circuit on appeal by the Federal government and cross-appeal by
Plaintiffs.  PNMR is unable to predict the outcome of this
litigation.





Western
United States Wholesale Power Market





Various
circumstances, including electric power supply shortages, weather conditions,
gas supply costs, transmission constraints and alleged market manipulation by
certain sellers, resulted in the well-publicized California and Western markets
energy crisis of 2000-2001 and the bankruptcy filings of the Cal PX and
PG&E.  As a result of the conditions in the Western markets during this
time period, between late-2000 and mid-2003, FERC, the California Attorney
General and private parties initiated investigations, litigation, and other
proceedings relevant to PNM and other sellers in the Western markets at FERC and
in both California State and Federal District Courts, seeking a determination
whether sellers of wholesale electric energy during the crisis period, including
PNM, should be ordered to pay monetary refunds to buyers of such energy. 
These proceedings continue at FERC as well as before the U.S. Court of Appeals
for the Ninth Circuit.  PNM has participated in these proceedings at FERC,
the Federal District Courts and the Ninth Circuit, including filing appeals to
that court.  Both FERC and the Ninth Circuit continue to hold settlement
and mediation conferences, in which PNM continues to
participate.





The Company cannot predict the ultimate outcome of the appeals or any FERC
decision resulting therefrom.  At this time, it is unclear whether PNM will
ultimately be directed to make refunds as a result of these court and FERC
decisions, or whether settlement may be reached.





Regional
Transmission Issues





In
February 2007, FERC issued Order 890 setting out the new OATT rule, which became
effective in May 2007.  Order 890 addressed several elements of
transmission service, including:  (1) requiring greater consistency
and transparency in calculating available transfer capability for transmission;
(2) requiring transparent transmission planning and customer access to
transmission plans; (3) reforming rollover rights for transmission service
agreements; and (4) clarifying various ambiguities in transmission rights under
the new OATT.   Order 890 also required numerous compliance
filings to be made by transmission providers.  Order 890 also
attempted to clarify certain elements of transmission service utilized for
network generation resources, but still left uncertain the transmission used for
such resources that pre-dated transmission open access.  PNM filed a
petition for rehearing seeking clarification of this issue in regards to one
such generation resource that PNM has under contract.  Although FERC
did not specifically rule on the request PNM filed, in December 2007, FERC
issued an order (“Order 890-A”) on rehearing and clarified and revised some
aspects of its initial order.  The order reiterated its general rule
on this topic, which had no impact on PNM operations.  In January
2008, multiple parties filed requests for rehearing of Order
890-A.  PNM did not join any of these rehearing
requests.  In June, 2008, FERC issued Order 890-B further clarifying
some aspects of Order 890 and Order 890-A.  Further rehearing could be
granted on Order 890-B, but the Company does not expect significant changes to
the existing orders.  In October 2008, the Company completed the FERC
compliance filings required by Order 890.





Complaint
Against Southwestern Public Service Company





In
September 2005, PNM filed a complaint under the Federal Power Act against SPS.
PNM argued that SPS’ rates for sale of interruptible energy were excessive and
that SPS had been overcharging PNM for deliveries of energy through its fuel
cost adjustment clause practices.  PNM also intervened in a complaint
proceeding brought by other customers raising similar arguments relating to SPS’
fuel cost adjustment clause practices (the “Golden Spread complaint
proceeding”).  Additionally, in November 2005, SPS filed an electric
rate case at FERC proposing to




B-96


PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008, 2007 and 2006





In April
2008, FERC issued its order in the Golden Spread complaint
proceeding.  FERC affirmed in part and reversed in part an ALJ’s
initial decision, which had, among other things, ordered SPS to pay refunds to
PNM with respect to the fuel clause issues.  FERC affirmed the
decision of the ALJ that SPS violated its fuel cost adjustment clause
tariffs.   However, FERC shortened the refund period applicable
to the violation of the fuel cost adjustment clause issues.PNM
and SPS have filed petitions for rehearing and clarification of the scope of the
remedies that were ordered and reversal of various rulings in the order. FERC
has not yet acted upon the requests for rehearing or clarification and they
remain pending further decision.  PNM cannot predict the final outcome
of the case at FERC.





Biomass
Project





PNM entered into a 20-year contract for
the purchase of 32 MW of capacity from a renewable biomass power generation
facility in central New Mexico that was scheduled to commence in 2009.  The
purchase power agreement was contingent upon the satisfaction of certain
conditions including, completion of financial closing by April 2, 2007 and the
start of construction by July 2, 2007.  After various delays, PNM
expected the biomass facility to begin commercial operations in late 2009 or
early 2010, provided adequate financing was obtained by June 1,
2008.  However, financing was not obtained by that date, and PNM
notified the owner on June 12, 2008, of the immediate termination of the
agreement.  On June 23, 2008, the owner advised PNM that it disputed
the basis for the termination, but the owner took no subsequent action to submit
the matter to arbitration within the time period specified in the agreement and
PNM considers this matter closed.





Begay
v. PNM et al





A
putative class action was filed against PNM and other utilities on February 11,
2009 in the United States District Court in Albuquerque.  PNM has not
been served.  Plaintiffs claim to be allottees, members of the Navajo
Nation, who pursuant to the Dawes Act of 1887, were allotted ownership in land
carved out of the Navajo Nation. Plaintiffs, including an allottee association,
make broad, general assertions that defendants, including PNM, are right-of-way
grantees with rights-of-way across the allotted lands and are either in trespass
or have paid insufficient fees for the grant of rights-of-way or both.  The
plaintiffs, who have sued the defendants for breach of fiduciary duty, seek a
constructive trust.  They have also included a breach of trust claim
against the United States and its Secretary of the Interior, Ken Salazar. 
PNM is evaluating plaintiffs’ claims.  PNM is unable to determine the
outcome of this case but intends to defend it vigorously.





(17)
            Regulatory
      and Rate Matters





PNMR








First
Choice Price-to-Beat Base Rate Reset





Based on
the terms of the Texas stipulation related to the acquisition of TNP, First
Choice made a filing to reset its price-to-beat base rates in 2005. First
Choice’s price-to-beat base rate case was consolidated with TNMP’s 60-day rate
review (see “60-Day Rate Review” below). First Choice requested that the PUCT
recognize in its new price-to-beat base rates the TNMP rate reduction and the
synergy savings credit provided for in the TNP acquisition stipulation. In 2006,
TNMP, First Choice, the PUCT staff and other parties filed a non-unanimous
settlement agreement (“NUS”).  The PUCT unanimously approved the NUS
on November 2, 2006 and made First Choice’s new price-to-beat base rates
effective on December 1, 2006, as First Choice had requested.  As
price-to-beat rates expired on December 31, 2006, the approved rates are no
longer applicable.  In January 2007, TNMP’s 60-Day Rate Review
proceeding and the underlying NUS were appealed by various Texas cities to a
Texas District Court.




B-97


PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008, 2007 and 2006





First
Choice Request for ERCOT Alternative Dispute Resolution





In June
2008, First Choice filed a request for alternative dispute resolution with ERCOT
alleging that ERCOT incorrectly applied its protocols with respect to congestion
management during the first quarter of 2008.  First Choice requests
that ERCOT resolve the dispute by restating certain elements of its first
quarter 2008 congestion management data and by refunding to First Choice
allegedly overstated congestion management charges.  The amount at
issue in First Choice’s claim can only be determined by running ERCOT market
models with corrected inputs but First Choice believes that the amount is
significant.  ERCOT protocols provide that ERCOT will notify
potentially impacted market participants and subsequently consider the merits of
First Choice’s allegations.  The Company is unable to predict the
outcome of this matter.





PNM





Gas
Rate Case





In May
2006, PNM filed a general gas rate case that asked the NMPRC to approve an
increase in the service fees charged to its 481,000 natural gas customers,
including the set monthly fee, the charge tied to monthly usage, and
miscellaneous on-demand service fees.  Those fees are separate from
the cost of gas charged to customers, which would not be affected by the fee
increase.  The petition requested an increase in base gas service
rates of $22.6 million and an increase in miscellaneous on-demand service rates
of $0.2 million.  In June 2007 the NMPRC unanimously approved an
increase in annual revenues of approximately $9 million for PNM.  PNM
and the AG filed appeals on various issues with the New Mexico Supreme
Court.  In connection with the acquisition of PNM’s gas assets by
NMGC, PNM and the AG
moved to dismiss their respective gas rate case appeals, which motions were
granted onFebruary 6, 2009.





Gas
      Utility Assets Sale and Service
Abandonment





In March
2008, PNM filed its application at the NMPRC seeking regulatory approval for the
sale of the gas utility assets and approval for the abandonment of its natural
gas utility service in New Mexico.  In a separate application filed
simultaneously at the NMPRC, NMGC requested approval to purchase PNM Gas’s
utility assets, requested the issuance of a Certificate of Convenience and
Necessity to operate the gas utility and provide natural gas utility service in
New Mexico, and for various other regulatory
approvals.    In August 2008, the NMPRC staff, the AG, the
IBEW, PNM and NMGC filed a stipulation indicating their agreement to a
resolution of the issues in the proceeding.  A hearing took place
before the NMPRC in September 2008.  The NMPRC issued its final order
in December 2008 approving the transaction, and the sale was completed on
January 30, 2009.





2007
Electric Rate Case





On
February 21, 2007, PNM filed a general electric rate case (“2007 Electric Rate
Case”) requesting the NMPRC approve an increase in service fees to all of PNM’s
retail customers except those formerly served by TNMP.  The request
was designed to provide PNM’s electric utility an opportunity to earn a 10.75
percent return on equity.  The application also requested
authorization to implement a FPPAC through which changes in the cost of fuel and
purchased power, above or below the costs included in base rates, will be passed
through to customers on a monthly basis.  Hearings were held in
December 2007.  On April 24, 2008, the NMPRC issued a final order that
resulted in a revenue increase of $34.4 million.  The rate increase
provides for a 10.1 percent return on equity.New rates reflecting the
$34.4 million increase were effective for bills rendered on and after May 1,
2008.  In its final order, the NMPRC disallowed recovery of costs
associated with the RECs used to meet the New Mexico Renewable Energy Portfolio
Standards that were being deferred as regulatory assets, but did allow PNM the
opportunity to seek recovery in the next rate case if it can demonstrate that it
incurred an actual incremental cost for its compliance with the
RPS.  The NMPRC also ruled that recovery of surface coal mine
decommissioning costs be capped at $100




B-98


PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008, 2007 and 2006





Emergency
FPPAC





On March
20, 2008, PNM and the IBEW, filed a joint motion in the general electric rate
case requesting NMPRC authorization to implement an Emergency FPPAC on an
interim basis.  The motion requested immediate authority to implement
an Emergency FPPAC for a period of 24 months or until the effective date of new
rates in PNM’s next rate case, whichever is earlier.





On May
22, 2008, the NMPRC issued a final order that approved the Emergency FPPAC with
certain modifications relating to power plant performance and the treatment of
revenue from SO2
allowances.  The Emergency FPPAC permits PNM to recover its actual
fuel and purchased power costs up to $0.024972 per kWh, which is an increase of
$0.008979 per kWh above the fuel costs included in base rates.  PNM is
unable to predict if actual fuel and purchased power costs will exceed the cap
during the period the Emergency FPPAC is in effect.PNM implemented the
Emergency FPPAC as modified on June 2, 2008.  The Albuquerque
Bernalillo County Water Utility Authority and the New Mexico Industrial Energy
Consumers Inc. filed notices of appeal to the New Mexico Supreme Court, which
seek to have vacated the NMPRC order approving the Emergency FPPCAC. The appeals
have been consolidated and PNM has been granted party status.  PNM is
unable to predict the final outcome of these appeals.





The NMPRC order approving the Emergency
FPPAC required PNM to pay for an audit of PNM’s monthly FPPAC reports and a
prudence review of PNM’s fuel and purchased power costs, to be conducted by
auditors selected by the NMPRC.  On February 11, 2009, the NMPRC
issued a RFP for related audit and prudence review professional
services.  The NMPRC order states that the prudence review shall
continue until all costs flowed through the Emergency FPPAC have been subject to
review.





2008
Electric Rate Case





On
September 22, 2008, PNM filed a general rate case (“2008 Electric Rate Case”)
requesting the NMPRC to approve an increase in electric service rates to all PNM
retail customers except those formerly served by TNMP. The proposed rates are
designed to increase annual operating revenue by $123.3 million, based on a
March 31, 2008 test period and calculating base fuel costs using a projection of
costs for the 12 months ending March 31, 2009. PNM has also proposed a FPPAC in
the general form authorized by the NMPRC, but with PNM retaining 25% of
off-system sales margins and crediting 75% against fuel and purchased power
costs. On September 30, 2008, the NMPRC ordered that PNM‘s proposed rates be
suspended for a period of nine months from October 22, 2008 and appointed a
hearing examiner to conduct a hearing and otherwise preside over the case. A
public hearing is scheduled to begin March 30, 2009.  On February 25,
2009, PNM, the NMPRC Staff and the AG filed a joint motion to vacate the
procedural schedule and to establish a new procedural schedule for consideration
of a possible stipulation.  The motion requested a schedule which would
result in the filing of a stipulation no later than March 10, 2009, with
hearings on the stipulation to begin April 9, 2009, if the stipulation is
contested, and April 13, 2009, if the stipulation is unopposed.  Although
some parties indicated they had not yet decided if they would oppose the
stipulation and would need more time than proposed if they decided to oppose, on
February 27, 2009, the Hearing Examiner issued an order vacating the existing
schedule and establishing a schedule for consideration of an unopposed
stipulation. March 6, 2009 was set as the date for filing the stipulation with
hearings to begin April 8, 2009.Settlement
discussions are continuing.PNM is unable
to predict the outcome of this proceeding.





B-99


PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008, 2007 and 2006





Additional
information concerning these proceedings is discussed below.





Valencia





In April
2007, PNM entered into a PPA to purchase all of the electric capacity and energy
from Valencia, a 148 MW natural gas-fired power plant near Albuquerque, New
Mexico.  An unaffiliated entity built, owns and operates the facility
and PNM is the sole purchaser of the electricity generated. The Valencia
facility began commercial operation on May 30, 2008.  For financial
accounting purposes PNM consolidates the plant under FIN 46R since PNM absorbs
the majority of the variability in the cash flows of the plant.  See
Note 9.





In May
2007, the office of the AG and the staff of the NMPRC filed a petition for
formal review requesting the NMPRC investigate the Valencia PPA and related
transactions to determine, among other things, whether the transactions were
prudent, appropriate and consistent with NMPRC rules, and to establish the
ratemaking treatment of the PPA.  In its response to the petition, PNM
described the terms of the agreement and process used to select this resource,
stated that an investigation was not warranted and joined in the staff and AG’s
request for determination of the ratemaking treatment for the
agreement.  The Resource Stipulation provides that upon its approval
by the NMPRC costs incurred under the Valencia PPA would be recovered through
PNM’s Emergency FPPAC until new base rates go into effect as a result of PNM’s
2008 Electric Rate Case, which would include recovery of the Valencia PPA in
base rates.





PVNGS Unit 2 Lease Interest
Transfer





On June
29, 2007, a wholly-owned subsidiary of PNMR purchased 100% of a trust, which
owns a 2.26% undivided interest, representing 29.8 MW, in PVNGS Unit 2 and a
0.76% undivided interest in certain PVNGS common facilities, as well as a lease
under which such facilities are leased to PNM.  In January 2008, PNM
filed an application at the NMPRC seeking approval to acquire the beneficial
ownership interest in the trust from the PNMR subsidiary.  PNM
requested recovery of the costs of acquiring the Unit 2 interest through
inclusion in its electric rates.  The filing also requested certain
variances from NMPRC filing and reporting requirements normally required for
general diversification filings.   If approved, the Resource
Stipulation would allow the Unit 2 interest to be transferred to PNM and the
acquisition costs to be recovered beginning with the 2008 Electric Rate
Case.





In April
2008, PNM also filed an application at FERC seeking FERC approval of the
proposed acquisition of the PVNGS Unit 2 interest.  FERC established a
comment date in early May 2008, and no comments or interventions were filed in
the docket.  On June 30, 2008, FERC issued its order approving the
transfer of the PVNGS Unit 2 interest to PNM.





Luna and
Lordsburg





On September 12, 2008, PNM filed an
application to include in jurisdictional rates its one-third ownership share of
Luna and its ownership of Lordsburg.  Luna consists of a gas-fired
combined cycle station with a total capacity of 570 MW located in Luna County,
New Mexico.  The plant was constructed in 2005-2006 and achieved




B-100


PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008, 2007 and 2006





NMPRC
      Inquiry on Fuel and Purchased Power Adjustment
  Clauses





In
October 2007, the NMPRC voted to open a notice of inquiry
that may eventually lead to establishing simple and consistent rules
for the implementation of FPPACs for all investor-owned utilities
and electric cooperatives in New Mexico.  The
investor-owned utilities and electric cooperatives were asked to
respond to a series of questions; the responses will be discussed
at a future workshop.  The NMPRC staff was directed
to make a filing dealing with the need for consistency of the fuel clauses,
streamlining, and whether a single methodology would be beneficial and should be
applied to all of the utilities.  PNM filed its comments in December
2007. No further proceedings have been scheduled.





NMPRC
Rulemaking on Disincentives to Energy Efficiency Programs





In
January 2008, the NMPRC issued a NOI to identify disincentives in utility
expenditures on energy efficiency and measures to mitigate those disincentives,
including specific ratemaking alternatives, issued a procedural order
determining that the proceeding should be conducted as a rulemaking and
appointed a Hearing Examiner to conduct workshops as part of the
process.  The workshops resulted in the drafting of proposed rule
revisions on both energy efficiency disincentives and on incentives for energy
efficiency investments.  On January 29, 2009, the NMPRC proposed
amendments to its energy efficiency rule, including provisions related to
incentives and regulatory disincentives and barriers.  On February 26,
2009, the NMPRC announced that it would revise its proposed
amendments.





TNMP





TNMP
Competitive Transition Charge True-Up Proceeding





The
purpose of the true-up proceeding was to quantify and reconcile the amount of
stranded costs that TNMP may recover from its transmission and distribution
customers.  A 2004 PUCT decision established $87.3 million as TNMP’s
stranded costs.  TNMP and other parties have made a series of appeals
on the ruling and it is currently before the Texas Supreme Court. TNMP is unable
to predict if the Texas Supreme Court will review the decision or the ultimate
outcome of this matter.





Interest
Rate for Calculating Carrying Charges on TNMP’s Stranded Cost





The PUCT
approved an amendment to the true-up rule in 2006, which results in a lower
interest rate that TNMP is allowed to collect on the unsecuritized true-up
balance through a CTC. The PUCT concluded that the correct rate at which a
utility should accrue carrying costs through a CTC is the weighted average of an
adjusted form of its marginal cost of debt and its unadjusted historical cost of
debt, with the weighting based on the utility’s most recently authorized capital
structure.  The new rate affects TNMP by lowering the previously
approved carrying cost rate of 10.93%.  After regulatory proceedings,
the PUCT issued an order approving the 8.31% rate proposed by TNMP and the PUCT
staff. Various municipal intervenors (“Cities”) appealed the PUCT’s order to the
District Court in Austin, Texas, with TNMP as an intervenor.  The
District Court affirmed the PUCT’s decision and the Cities filed an appeal in
the Texas 3rd Court
of Appeals.  Oral argument was held on February 26,
2009.  TNMP is unable to predict the ultimate outcome of this
matter.





B-101
 PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008, 2007 and 2006


Following
the revision of the interest rate on TNMP’s carrying charge, TNMP filed a
compliance tariff to implement the new 8.31% rate. TNMP’s filing proposed to put
the new rates into effect on February 1, 2008.  Intervenors asserted
objections to the compliance filing.  PUCT staff urged that the PUCT
make the new rate effective as of December 27, 2007 when the PUCT’s order
establishing the correct rate became final.  After regulatory
proceedings, the PUCT issued an order making the new rate retroactive to July
20, 2006.  TNMP filed an appeal of this order in the District Court in
Austin, Texas.  While there is inherent uncertainty in this type of
proceeding, TNMP believes it will ultimately be successful in overturning any
ruling that the effective date should be prior to December 27,
2007.





60-Day
Rate Review





In 2005,
TNMP made a required 60-day rate review filing.  TNMP’s case
establishes a CTC for recovery of the true-up balance.  As noted
above, TNMP’s 60-day rate review, along with First Choice’s price-to-beat rate
reset filing, were consolidated.  See “Price-To-Beat Base Rate Reset”
above for further updates.  In 2006, the PUCT issued a signed order
which would allow TNMP to begin collecting its true-up balance, which includes
carrying charges, over a 14-year period.  The order also allows TNMP
to collect expenses associated with several cases over a three-year
period.  TNMP began collecting its CTC and its rate case expenses on
December 1, 2006.  In January 2007, this proceeding was appealed by
various Texas cities to the District Court, in Austin, Texas.  TNMP
and First Choice have intervened.TNMP is unable to predict
the ultimate outcome of this matter.





2008
Rate Case





On August
29, 2008, TNMP filed with the PUCT for an $8.7 million increase in
revenues.  If approved, new rates would go into effect in September
2009.  In its request, TNMP also asked for permission to implement a
catastrophe reserve fund similar to those approved for other transmission and
distribution companies in Texas. Catastrophe funds help pay for a utility
system’s recovery from natural disasters and acts of terrorism.  Once
the rate case is finalized by the PUCT, TNMP may update its transmission rates
annually to reflect changes in its invested capital.  Updated rates
would reflect the addition and retirement of transmission facilities, including
appropriate depreciation, federal income tax and other associated taxes, and the
approved rate of return on such facilities. On October 10, 2008, the PUCT issued
a preliminary order permitting TNMP to file supplemental testimony on costs
caused by Hurricane Ike. These costs may be included in rates or captured as a
regulatory asset for review and approval in a subsequent proceeding.





In
December 2008, the parties in the TNMP rate case requested that the case be
abated and the ALJ granted the request.  The abatement suspends
indefinitely all procedural deadlines and those dates will be rescheduled
following the submittal of supplemental testimony by TNMP relating to costs
incurred during Hurricane Ike and anticipated financing costs.  TNMP is
unable to predict the ultimate outcome of this matter.





(18)
            Environmental
      Issues





The
normal course of operations of the Company necessarily involves activities and
substances that expose the Company to potential liabilities under laws and
regulations protecting the environment.  Liabilities under these laws
and regulations can be material and in some instances may be imposed without
regard to fault, or may be imposed for past acts, even though the past acts may
have been lawful at the time they occurred.  Sources of potential
environmental liabilities include the Federal Comprehensive Environmental
Response Compensation and Liability Act of 1980 and other similar
statutes.





The
Company records its environmental liabilities when site assessments or remedial
actions are probable and a range of reasonably likely cleanup costs can be
estimated.  The Company reviews its sites and measures the liability
quarterly, by assessing a range of reasonably likely costs for each identified
site using currently available information, including existing technology,
presently enacted laws and regulations, experience gained at similar sites, and
the probable level of involvement and financial condition of other potentially
responsible parties. These estimates include costs for site investigations,
remediation, operations and maintenance, monitoring and site
closure.




B-102


PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008, 2007 and 2006





The
Company’s recorded liability estimated to remediate its identified sites was as
follows:





PNMR
            
            PNM
            
            TNMPDecember
      31,
            
            December
      31,
            
            December
      31,2008
            
            2007
            
            2008
            
            2007
            
            2008
            
            2007(In
      thousands)$5,308
            
            $4,882
            
            $5,308
            
            $4,882
            
            $  -
            
            $
      -





The
Company expended the following for remediation:





Year
      Ended December 31,2008
            
            
            2007
            
            
            2006(In
      thousands)PNMR
            
            $
            190
            
            
            $
            469
            
            
            $
            747PNM
            
            $
            190
            
            
            $
            469
            
            
            $
            501TNMP
            
            $
            -
            
            
            $
            -
            
            
            $
            246








The
ultimate cost to clean up the Company’s identified sites may vary from its
recorded liability due to numerous uncertainties inherent in the estimation
process, such as the extent and nature of contamination, the scarcity of
reliable data for identified sites, and the time periods over which site
remediation is expected to occur.  The Company expects that the
majority of the December 31, 2008 environmental liability will be paid over the
next five years, funded by cash generated from operations.  Future
environmental obligations are not expected to have a material impact on the
results of operations or financial condition of the Company.





(19)
            Accumulated
      Other Comprehensive Income





AOCI
reports a measure for accumulated changes in equity that result from
transactions and other economic events other than transactions with
shareholders.  The following table sets forth each component of AOCI,
net of income taxes:





Mark-to-Unrealized
            
            
            
            
            
            market
      for
            
            
            Accumulatedgain
      (loss)
            
            
            Pension
            
            
            cash-flow
            
            
            otheron
            
            
            liability
            
            
            hedge
            
            
            comprehensivesecurities
            
            
            adjustment
            
            
            transactions
            
            
            income
      (loss)(In
      thousands)PNMRBalance
      at December 31, 2007
            
            $
            12,985
            
            
            $
            (4,794
            )
            
            $
            3,017
            
            
            $
            11,208Balance
      at December 31, 2008
            
            $
            1,721
            
            
            $
            (8,998
            )
            
            $
            38,225
            
            
            $
            30,948PNMBalance
      at December 31, 2007
            
            $
            12,985
            
            
            $
            (5,615
            )
            
            $
            210
            
            
            $
            7,580Balance
      at December 31, 2008
            
            $
            1,721
            
            
            $
            (8,854
            )
            
            $
            24,879
            
            
            $
            17,746TNMPBalance
      at December 31, 2007
            
            $
            -
            
            
            $
            823
            
            
            $
            -
            
            
            $
            823Balance
      at December 31, 2008
            
            $
            -
            
            
            $
            (142
            )
            
            $
            -
            
            
            $
            (142
            )


B-103
 PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008, 2007 and 2006


(20)
              Related
      Party Transactions





PNMR,
PNM, TNMP, and Optim Energy are considered related parties as defined in
SFAS 57.  PNMR Services Company provides corporate services to
PNMR, its subsidiaries, and Optim Energy in accordance with shared services
agreements.  These services are billed on a monthly basis to the
business units.  Billings are at cost, except for Optim Energy, which
includes a profit element. There is also a services agreement for Optim Energy
to provide services to PNMR.





PNMR
files a consolidated federal income tax return with its affiliated
companies.  A tax allocation agreement exists between PNMR and each of
its affiliated companies.  These agreements provide that the
subsidiary company will compute its taxable income on a stand-alone
basis.  If the result is a net tax liability, such amount shall be
paid to PNMR.  If there are net operating losses and/or tax credits,
the subsidiary shall receive payment for the tax savings from PNMR to the extent
that PNMR is able to utilize those benefits.





See Note
6 for information on intercompany borrowing arrangements and Note 7 for
intercompany lease arrangements.





PNM and
TNMP engaged in various affiliate transactions during 2006 to best utilize the
resources held by both companies.  Through December 31, 2006, PNM also
sold electricity and energy-scheduling services to TNMP under a long-term
wholesale power contract.  Effective January 1, 2007, TNMP’s New
Mexico customers were transferred to PNM.  TNMP sells transmission and
distribution services to First Choice.





PNMR
Services Company incurs capital expenditures related to buildings and
software.  These expenditures are normally reimbursed through
management fee billings as the assets depreciate.  In order to pay
down line of credit borrowings, PNMR Services Company required capital
expenditures to be reimbursed more timely.  In October 2006, all
expenditures related to capital were billed to PNMR subsidiaries.  The
amount paid by the subsidiaries is in a deferred asset account that will be
relieved as the assets on PNMR Services Company depreciate.





See Note
22 for information concerning Optim Energy.  See Note 23 for
information concerning the transfer of operations from TNMP to PNM and the sale
of PNM Gas.  The table below summarizes the nature and amount of
related party transactions of PNMR, PNM and TNMP:


B-104
 PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008, 2007 and 2006





Year
      Ended December 31,2008
            
            
            2007
            
            
            2006(In
      thousands)Electricity,
      transmission and distribution related services billings:PNM
      to TNMP
            
            $
            -
            
            
            $
            126
            
            
            $
            50,817TNMP
      to PNMR
            
            
            55,214
            
            
            
            69,731
            
            
            
            68,555Services
      billings:PNMR
      to PNM*
            
            
            81,724
            
            
            
            93,910
            
            
            
            122,684PNMR
      to TNMP
            
            
            19,043
            
            
            
            18,302
            
            
            
            24,637PNM
      to TNMP
            
            
            1,672
            
            
            
            261
            
            
            
            554PNMR
      to Optim Energy
            
            
            11,316
            
            
            
            10,734
            
            
            
            -Optim
      Energy to PNMR
            
            
            672
            
            
            
            116
            
            
            
            -PNMR
      Services capital expenditures fees:PNM
      to PNMR**
            
            
            -
            
            
            
            99
            
            
            
            30,695TNMP
      to PNMR
            
            
            -
            
            
            
            18
            
            
            
            5,281Income
      tax sharing payments:PNM
      to PNMR
            
            
            2,050
            
            
            
            5,604
            
            
            
            32,729TNMP
      to PNMR
            
            
            15,079
            
            
            
            -
            
            
            
            7,001PNMR
      to TNMP
            
            
            -
            
            
            
            (15,529
            )
            
            
            -Interest
      payments:PNM
      to PNMR
            
            
            -
            
            
            
            3
            
            
            
            -TNMP
      to PNMR
            
            
            133
            
            
            
            1,165
            
            
            
            -





* PNM
Shared services include billings to PNM Gas of $22.2 million, $ 32.0 million,
and $ 41.5 million 2008, 2007, and 2006.





** PNM
Capital Expenditures Fees include billings to PNM Gas of $ 8.5 million for the
year 2006.





(21)
              New
      Accounting Pronouncements





Information
regarding recently issued accounting pronouncements, including those that have
not been adopted by the Company could have a material impact, is set forth
below.





SFAS
160 – Noncontrolling Interest in Consolidated Financial Statements





In
December 2007, the FASB issued SFAS 160.  The objective of SFAS 160 is
to improve the relevance, comparability and transparency in ownership
interests.  SFAS 160 will change the way companies measure and present
an acquisition of a noncontrolling (minority) and changes in a controlling
interest.  The Company will adopt SFAS 160 beginning January 1, 2009,
which will result in minority interests being reflected in stockholders’ equity
rather than as liabilities.





SFAS
141R – Business Combinations





Also in
December 2007, the FASB completed re-deliberations and issued the final standard
of SFAS 141R. The revisions to this accounting standard further the FASB’s
increased use of fair value in financial statements.  The underlying
principle of SFAS 141R is for an acquirer to measure all assets acquired and
liabilities assumed at fair




B-105


PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008, 2007 and 2006





SFAS
161 – Disclosures about Derivative Instruments and Hedging Activities—an
amendment of FASB Statement No. 133





In March
2008, the FASB released SFAS 161, which is effective for years beginning after
November 15, 2008 and changes the disclosure requirements for derivative
instruments and hedging instruments.  Entities are required to provide
enhanced disclosures about (a) how and why an entity uses derivative
instruments, (b) how derivative instruments and related hedged items are
accounted for under SFAS 133 and its related interpretations, and (c) how
derivative instruments and related hedged items affect an entity’s financial
position, results of operation, and cash flows.  The Company is
currently reviewing the requirements of SFAS 161 and will implement the required
disclosures at March 31, 2009.





SFAS
162 – The Hierarchy of Generally Accepted Accounting Principles





The
current GAAP hierarchy had been set forth in the American Institute of Certified
Public Accountants Statement on Auditing Standards No. 69.  The FASB
concluded that the GAAP hierarchy should reside in the accounting literature
established by the FASB and issued SFAS 162, which establishes the current
hierarchy of GAAP, including making minor shifts in the hierarchy. This
statement was effective November 15, 2008.  The Company has reviewed
the impact of SFAS 162 and does not believe it will result in a change in
current practice.





FSP
FAS 132R-1 – Employers’ Disclosures about Postretirment Benefit Plan
Assets





In
December 2008, the FASB released FSP FAS 132R-1, which is effective for years
ending after December 15, 2009 and changes the disclosure requirements for plan
assets in a defined benefit pension or other postretirement benefit
plan.  Entities are required to provide enhanced disclosures about (a)
how investment allocation decisions are made, including the factors that are
pertinent to understanding investment policies and strategies, (b) the major
categories of plan assets, (c) the inputs and valuation techniques used to
measure the fair value of plan assets, (d) the level of fair value measurements
using significant unobservable inputs and, (e) significant concentrations of
risk within plan assets.  The company is currently reviewing the
requirements of FSP FAS 132R-1 and will implement the required disclosures at
December 31, 2009.





FSP FAS157-2– Effective
Date of FASB Statement No. 157





As
discussed in Note 8, the Company adopted SFAS 157 as of January 1,
2008.   On February 12, 2008, the FASB issued FSP FAS 157-2,
which delays the effective date of SFAS 157 for nonfinancial assets and
liabilities, except for items that are recognized or disclosed at fair value in
the financial statements on a recurring basis.  The Company will adopt
FSP FAS 157-2 and will apply it to fair value determinations utilized by the
Company in evaluating long-lived and intangible assets for potential impairment
in 2009, although the Company does not anticipate it will have a significant
impact.








(22)
            Optim
      Energy





In
January 2007, PNMR and ECJV, a wholly owned subsidiary of Cascade, created
EnergyCo, to serve expanding U.S. markets, principally the areas of Texas
covered by ERCOT.  EnergyCo’s name was changed to Optim Energy on
February 2, 2009.  PNMR and ECJV each have a 50 percent ownership
interest in Optim Energy, a limited liability company.





B-106
 PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008, 2007 and 2006


On June
1, 2007, PNMR contributed its ownership of Altura to Optim Energy at fair value
of $549.6 million (after the working capital adjustment described below). ECJV
made a cash contribution to Optim Energy equal to 50% of the fair value amount,
and Optim Energy distributed that cash to PNMR.  PNMR accounted for
this transaction by (1) removing the assets and liabilities transferred to Optim
Energy from its consolidated financial statements; (2) recording an additional
investment in Optim Energy for an amount equal to 50% of the net carrying value
of the Altura assets and liabilities transferred, reflecting that 50% of the
items transferred are in effect still owned by PNMR; and (3) reflecting in
results of operations the difference between the cash received and 50% of the
net carrying value of the items transferred that in effect were sold to ECJV,
which resulted in a pre-tax loss of $3.1 million being reflected in energy
production costs.  As provided under the contribution agreement,
subsequent to June 1, 2007, an adjustment to the contribution amounts was made
for changes in components of working capital between the date for which fair
value was determined and closing.  The result of this adjustment was a
payment by PNMR of $2.1 million.





Optim
Energy has entered into a bank financing arrangement with a term of five years,
which includes a revolving line of credit.  This facility also
provides for bank letters of credit to be issued as credit support for certain
contractual arrangements entered into by Optim Energy.  Cascade and
ECJV have guaranteed Optim Energy’s obligations on this facility and, to secure
Optim Energy’s obligation to reimburse Cascade and ECJV for any payments made
under the guaranty, have a first lien on all assets of Optim Energy and its
subsidiaries.  In June 2007, Optim Energy distributed $87.5 million to
each of PNMR and ECJV from a long-term borrowing under this
facility.





Effective
August 1, 2007, Optim Energy completed the acquisition of Altura Cogen, a 614 MW
natural gas-fired cogeneration electric and steam plant, located near Houston,
Texas.  The purchase price of $477.9 million, after working capital
adjustments, was funded through cash contributions of $42.5 million from each of
PNMR and ECJV and the remaining amount was financed through borrowings under
Optim Energy’s credit facility.





On August
2, 2007, PNMR announced that Optim Energy has agreed with NRG Energy, Inc. to
jointly develop a 550 MW combined-cycle natural gas unit at the existing NRG
Cedar Bayou Generating Station near Houston.  Optim Energy anticipates
the construction of the project will be completed in the summer of 2009, at
which time 275 MW of electricity will be available for sale by Optim
Energy.  Optim Energy expects to fund its portion of the Cedar Bayou
construction with borrowings under its existing credit facility. Once the
project is complete, Optim Energy may arrange long-term financing of an
appropriate mix of debt and equity.  PNMR does not anticipate making
significant capital contributions to Optim Energy in connection with this
project.





PNMR has
no commitments or guarantees with respect to Optim Energy.





B-107
 PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008, 2007 and 2006


Summarized
financial information for Optim Energy is as follows:





Year
      Ended December 31,(In
      thousands)2008
            
            
            2007Operating
      revenues
            
            $
            472,665
            
            
            $
            224,339Cost
      of sales
            
            
            366,477
            
            
            
            147,312Gross
      margin
            
            
            106,188
            
            
            
            77,027Non-fuel
      operations and maintenance expenses
            
            
            26,053
            
            
            
            13,253Administrative
      and general expenses
            
            
            26,232
            
            
            
            15,445Impairment
      of intangible assets
            
            
            21,794
            
            
            
            -Write
      off of emission allowances
            
            
            31,739
            
            
            
            -Depreciation
      and amortization expense
            
            
            30,545
            
            
            
            15,665Interest
      expense
            
            
            19,183
            
            
            
            17,907Taxes
      other than income tax
            
            
            11,954
            
            
            
            4,804Other
      (income) and deductions
            
            
            (740
            )
            
            
            (635)Earnings
      (loss) before income taxes
            
            
            (60,572
            )
            
            
            10,588Income
      taxes (benefit)(1)
            
            
            (88
            )
            
            
            434Net earnings (loss)
            
            $
            (60,484
            )
            
            $
            10,15450
      percent of net earnings (loss)
            
            $
            (30,242
            )
            
            $
            5,077Amortization
      of basis difference in Optim Energy
            
            
            555
            
            
            
            2,504PNMR
      equity in net earnings (loss) of Optim Energy
            
            $
            (29,687
            )
            
            $
            7,581





(1)  Represents
the Texas Margin Tax, which is considered an income tax.





December
      31,2008
            
            
            2007(In
      thousands)Current
      assets
            
            $
            151,677
            
            
            $
            119,255Net
      property plant and equipment
            
            
            946,420
            
            
            
            853,492Deferred
      assets
            
            
            224,776
            
            
            
            297,197Total assets
            
            
            1,322,873
            
            
            
            1,269,944Current
      liabilities
            
            
            104,826
            
            
            
            88,812Long-term
      debt
            
            
            730,778
            
            
            
            650,778Other
      long-term liabilities
            
            
            7,763
            
            
            
            34,344Total liabilities
            
            
            843,367
            
            
            
            773,934Owners’
      equity
            
            $
            479,506
            
            
            $
            496,01050 percent of owners’ equity
            
            
            239,753
            
            
            $
            248,005Unamortized PNMR basis difference in Optim Energy
            
            
            197
            
            
            
            89PNMR equity investment in Optim Energy
            
            $
            239,950
            
            
            $
            248,094





Power
sales and purchases are included net in operating revenues.  Gas sales and
purchases are included net in cost of sales.  Financial transactions are
presented on a net basis in revenue for power and on a net basis in cost of
sales for gas.  Certain of these transactions were presented on a
gross basis during interim periods of 2008.





B-108
 PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008, 2007 and 2006


SFAS 141
requires that Optim Energy individually value each asset and liability received
in the Altura (Twin Oaks) and Altura Cogen transactions and initially record
them on its balance sheet at the determined fair value.  For both
transactions, this accounting results in a significant amount of amortization
since contracts acquired were out of market and emission allowances, while
acquired from government programs without cost to Optim Energy, have significant
market value.  During 2008 and 2007, Optim Energy recorded, as
operating revenues, income from amortization of contracts acquired of $2.2
million and $36.4 million, which is recorded in operating revenues, and
amortization expense on emission allowances of $11.2 million and $2.3 million,
which is recorded in cost of sales.





In July
2008, a federal appeals court ruling by the U.S. Court of Appeals for the
District of Columbia Circuit Court invalidated CAIR.  This ruling
appears to remove the need for emissions allowance credits under the CAIR
program. However, in December 2008, CAIR was temporarily reinstated by the
courts.  Optim Energy has inventory of emissions allowances from the
purchase of the Altura Cogen plant and contribution of the Twin Oaks
plant.  During 2008, Optim Energy recorded a pre-tax write off of
$31.7 million for all inventory under the CAIR program.  As of
December 31, 2008, Optim Energy has $115.9 million in inventory for emission
allowances not granted under the CAIR program.





The
contribution of Altura created a basis difference between PNMR’s recorded
investment in Optim Energy and 50 percent of Optim Energy’s
equity.  While the portion of the basis difference related to contract
amortization will only continue through 2010, other basis differences, including
a difference related to emission allowances, will continue to exist through the
life of the Altura plant.  For 2008 and 2007, the basis difference
adjustment detailed above relates mainly to contract amortization with
insignificant offsets related to the other minor basis difference
components.





Optim
Energy has a hedging program that covers a multi-year period.  The
level of hedging at any given time varies depending on current market conditions
and other factors.  Economic hedges that do not qualify for or are not
designated as cash flow hedges or normal purchases/sales under SFAS 133 are
derivative instruments that are required to be marked to market.  Due
to the extreme market volatility experienced in the first quarter in the ERCOT
market, Optim Energy made the decision to exit the speculative trading business
and close out the speculative trading positions.  In May 2008, Optim
Energy closed out all remaining speculative positions.  Optim Energy
recognized speculative trading losses of $2.4 million in the first quarter of
2008.  No additional costs are expected related to speculative
trading.





The
assets of Altura transferred to Optim Energy included the development rights for
a possible 600-megawatt expansion of the Twin Oaks plant, which was classified
as an intangible asset.  Optim Energy made a strategic decision not to
pursue the Twin Oaks expansion at this time and, in 2008, wrote off the
development rights as an impairment of intangible assets amounting to $21.8
million.  In addition $1.2 million of deferred costs related to this
project were written off as administrative and general expense.





See Note
6 for a discussion of the impacts of the bankruptcy of LBCS.





On
January 6, 2009, LCC filed for bankruptcy protection under Chapter 11 of the US
Bankruptcy Code.  LCC is Optim Energy’s counterparty in several
agreements, and is a major customer of Optim Energy.  In addition, LCC
leases Optim Energy the land for the Altura Cogen facility and provides other
services, including water, to that facility.  The net amount due from
LCC as of year-end has been fully reserved.  LCC has continued to
perform under the existing contracts and Optim Energy believes that LCC will
continue to perform under the existing contracts.





(23)
            Discontinued
      Operations





PNM
Gas





As
discussed in Note 2, PNM completed the sale of its gas operations, which
comprise the PNM Gas segment, on January 30, 2009.  Under GAAP, the
assets and liabilities of PNM Gas are considered to be held-for-




B-109


PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008, 2007 and 2006


Results
of Operations





Year
      Ended December 31,2008
            
            
            2007
            
            
            2006(In
      thousands)Operating
      revenues
            
            $
            506,953
            
            
            $
            508,546
            
            
            $
            508,829Cost
      of energy
            
            
            346,571
            
            
            
            352,807
            
            
            
            361,873Gross
      margin
            
            
            160,382
            
            
            
            155,739
            
            
            
            146,956Operating
      expenses
            
            
            92,177
            
            
            
            97,102
            
            
            
            96,771Depreciation
      and amortization
            
            
            -
            
            
            
            21,649
            
            
            
            21,609Operating
      income
            
            
            68,205
            
            
            
            36,988
            
            
            
            28,576Other
      income (deductions)
            
            
            2,590
            
            
            
            1,147
            
            
            
            4,136Net
      interest charges
            
            
            (13,210
            )
            
            
            (12,225
            )
            
            
            (11,415
            )Segment
      earnings before income taxes
            
            
            57,585
            
            
            
            25,910
            
            
            
            21,297Income
      taxes (benefit)
            
            
            22,957
            
            
            
            10,394
            
            
            
            8,439Segment
      Earnings
            
            $
            34,628
            
            
            $
            15,516
            
            
            $
            12,858





Financial
Position





Year
      Ended December 31,2008
            
            
            2007(In
      thousands)ASSETSCash
      and cash equivalents
            
            $
            25
            
            
            $
            28Accounts
      receivable and unbilled revenues, net
            
            
            64,022
            
            
            
            89,699Regulatory
      and other current assets
            
            
            43,939
            
            
            
            30,334Total current assets
            
            
            107,986
            
            
            
            120,061Gas
      plant in service
            
            
            775,836
            
            
            
            743,664Accumulated
      depreciation and amortization
            
            
            (239,280
            )
            
            
            (245,741
            )Construction
      work in progress
            
            
            22,574
            
            
            
            22,411Net utility plant
            
            
            559,130
            
            
            
            520,334Regulatory
      and other assets
            
            
            2,785
            
            
            
            6,205$
            669,901
            
            
            $
            646,600LIABILITIES
      AND EQUITYAccounts
      payable and accrued expenses
            
            $
            44,995
            
            
            $
            68,458Regulatory
      and other current liabilities
            
            
            32,087
            
            
            
            27,545Total current liabilities
            
            
            77,082
            
            
            
            96,003Regulatory
      liabilities
            
            
            75,296
            
            
            
            72,727Deferred
      credits and other liabilities
            
            
            19,319
            
            
            
            17,121Total deferred credits and other liabilities
            
            
            94,615
            
            
            
            89,848Equity
            
            
            498,204
            
            
            
            460,749$
            669,901
            
            
            $
            646,600





B-110


PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008, 2007 and 2006





December
      31,2008
            
            
            2007(In
      thousands)Assets:Current:PGAC
            
            $
            13,165
            
            
            $
            11,769Other
            
            
            9,670
            
            
            
            74422,835
            
            
            
            12,513Non-Current:OPEB
            
            
            -
            
            
            
            2,900Other
            
            
            1,435
            
            
            
            1,9911,435
            
            
            
            4,891Total regulatory assets
            
            $
            24,270
            
            
            $
            17,404Liabilities:Current:PGAC
            
            $
            -
            
            
            $
            (2,623
            )Off-system sales margin
            
            
            (303
            )
            
            
            (1,166
            )Other
            
            
            (579
            )
            
            
            (510
            )(882
            )
            
            
            (4,299
            )Non-Current:Cost of Removal
            
            
            (75,295
            )
            
            
            (72,727
            )Total regulatory liabilities
            
            $
            (76,177
            )
            
            $
            (77,026
            )





PNM Gas’s
cost-of-gas revenues collected from sales-service customers were recovered in
accordance with NMPRC regulations through the PGAC and represented a
pass-through of the cost of natural gas to the customer.  The NMPRC
approved an agreement regarding the hedging strategy of PNM Gas and the
implementation of a price management fund program which included a continuous
monthly balancing account with a carrying charge.  This carrying
charge had the effect of keeping PNM Gas whole on purchases of gas since it was
compensated for the time value of money that existed due to any delay in
collections from customers.





PNM Gas
used a variety of hedging instruments including fixed price contracts, call
options and financial swaps to facilitate the hedge strategy. PNM Gas also
entered into physical gas contracts to meet the needs of its retail
sales-service customers.  Due to the agreement to sell PNM Gas, the
contracts that extended beyond December 31, 2008 no longer qualified for the
normal purchases exception pursuant to SFAS 133 as of December 31, 2007 and were
marked-to-market. Costs and gains and losses for the above instruments are
deferred and recovered through the PGAC with no income statement
effect.  At December 31, 2008, PNM Gas had $7.0 million of current
assets and current liabilities and no long-term assets and long-term liabilities
related to these instruments.  At December 31, 2007, PNM Gas had $7.1
million of current assets and current liabilities related to these
instruments.





TNMP
– New Mexico





In
connection with the 2005 acquisition of TNP and its principal subsidiaries, TNMP
and First Choice, the NMPRC stipulated that all TNMP’s New Mexico operations
would transfer to the ownership of PNM.  This transfer took place on
January 1, 2007 when TNMP transferred its New Mexico operational assets and
liabilities to PNMR through redemption of TNMP’s common stock.  PNMR
contemporaneously contributed the TNMP New Mexico operational assets and
liabilities to PNM.





In
accordance with SFAS 144 and EITF 03-13, the Company determined that the New
Mexico operations component of TNMP is required to be reported as discontinued
operations in the TNMP Consolidated Statements of




B-111


PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008, 2007 and 2006





Under
SFAS 154, the asset transfer did not meet the definition of a “change in
reporting entity” since PNM’s financial statement composition remained unchanged
after the transfer.  The assets and operations transferred from TNMP
are in the same line of business as PNM and are immaterial to both PNM’s assets
and net earnings.





The
following table summarizes the results classified as discontinued operations in
TNMP’s Consolidated Statements of Earnings:





Year
      EndedDecember
      31,2006(In
      thousands)Operating
      revenues
            
            $
            99,121Operating
      expenses and other income
            
            
            93,992Earnings from discontinued operations before income tax
            
            
            5,129Income
      tax expense
            
            
            1,548Earnings from discontinued operations
            
            $
            3,581





The
following table summarizes the TNMP New Mexico assets and liabilities
transferred to PNM:





January
      1,2007(In
      thousands)Current
      assets
            
            $
            15,444Other
      property and investments
            
            
            10Utility
      plant, net
            
            
            96,468Goodwill
            
            
            102,775Deferred
      charges
            
            
            1,377Total assets transferred to PNM
            
            
            216,074Current
      liabilities
            
            
            17,313Long-term
      debt
            
            
            1,065Deferred
      credits and other liabilities
            
            
            30,673Total liabilities transferred to PNM
            
            
            49,051Net assets transferred between entities
            
            $
            167,023





(24)
            Business
      Improvement Plan





In 2007,
the Company began a business improvement process that included a comprehensive
cost structure analysis of its operations and a benchmarking analysis to
similar-sized utilities.  During 2007 and 2008, the Company
implemented a series of initiatives designed to manage future operational costs,
maintain financial strength and strengthen its regulated
utilities.   The multi-phase process includes a business
improvement plan to streamline internal processes and reduce the Company’s work
force.  The utility-related process enhancements are designed to
improve and centralize business functions.


B-112
 PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008, 2007 and 2006


The
Company has existing plans providing severance benefits to employees who are
involuntarily terminated due to elimination of their positions.  Under
SFAS 112, the severance benefits payable under the Company’s existing
plans are recorded when it is probable that a liability has been incurred
and the amount can be reasonably estimated.  At December 31, 2008 and
2007, the Company assessed the status of the business improvement plan process
and the positions that were probable of being eliminated as determined at that
time.  The Company calculated the severance benefits associated with
those positions and recorded pre-tax expense of $3.4 million in 2008 and $10.5
million in 2007.  In 2008 and 2007, severance expenses of zero and
$5.0 million were recorded by PNM and $0.1 million and $0.6 million were
recorded by TNMP.  The Company also incurred other costs, primarily
consulting fees, related to the business improvement plan of $7.5 million and
$2.1 million in 2008 and 2007.  As additional phases of the business
improvement plan are developed, the associated costs will be analyzed and
recorded as specified by GAAP.





(25)
            Goodwill
      and Other Intangible Assets;
Impairments





The
excess purchase price over the fair value of the assets acquired and the
liabilities assumed by PNMR for its June 6, 2005 acquisition of TNP was recorded
as goodwilland was
pushed down to the businesses acquired.  In 2007, the TNMP assets that
were included in its New Mexico operations, including goodwill of $102.8
million, were transferred to PNM.  See Note 23.  Of the
$79.3 million of other intangible assets acquired in the TNP acquisition, $68.8
million related to the trade name “First Choice.”  The trade name is
considered to have an indefinite useful life; therefore, no amortization is
recorded.  The other $10.5 million intangible asset related to the
First Choice customer list.  The useful life of the customer list was
estimated to be approximately eight years.





Under the
provisions of SFAS 142, the Company evaluates its goodwill and non-amortizing
intangible assets for impairment annually at the reporting unit level or more
frequently if circumstances indicate that the goodwill or intangible assets may
be impaired.  Application of the impairment test requires judgment,
including the identification of reporting units, assignment of assets and
liabilities to reporting units and determination of the fair value of each
reporting unit.  The fair value of each reporting unit is estimated
using a discounted cash flow methodology.  This analysis requires
significant judgments, including estimation of future cash flows, which is
dependent on internal forecasts, estimation of long-term growth rates for the
business and determination of appropriate weighted average cost of capital for
each reporting unit.  Changes in these estimates and assumptions could
materially affect the determination of fair value and the conclusion of
impairment for each reporting unit.





For
non-amortizing intangibles other than goodwill, the Company compares the fair
value of the intangible asset to its recorded value.  For goodwill,
the first step of the impairment test requires that the Company compare the fair
value of each reporting unit with its carrying value, including
goodwill.  If as a result of this analysis, the Company concludes
there is an indication of impairment in a reporting unit having goodwill, the
Company is required to perform the second step of the SFAS 142 impairment
analysis, determining the amount of goodwill impairment to be
recorded.  The amount is calculated by comparing the implied fair
value of the goodwill to its carrying amount.  This exercise requires
the Company to allocate the fair value determined in step one to the individual
assets and liabilities of the reporting unit.  Any remaining fair
value would be the implied fair value of goodwill on the testing
date.  To the extent the recorded amount of goodwill of a reporting
unit exceeds the implied fair value determined in step two, an impairment loss
is reflected in results of operations.





The
market capitalization of PNMR’s common stock has been significantly below book
value during 2008, which is an indicator that intangible assets may be
impaired.  In addition, changes in the ERCOT market in which First
Choice operates have significantly impacted its results of operations. The
Company performed its annual testing of intangible assets as of April 1,
2008.  As a result of this analysis, the Company concluded there was
an indication of impairment in the reporting units having goodwill and that the
First Choice trade name was impaired and recorded impairments of $135.0 million
for goodwill and $9.0 million for the First Choice trade name.  The
financial challenges facing First Choice continued throughout 2008 and were
exacerbated by the impacts of Hurricane Ike and depressed economic conditions
resulting in significant increases in the levels of uncollectible
accounts.  Due to these conditions, additional impairment testing was
performed for First Choice as of December 31, 2008.  As a result, the
Company recorded additional impairment losses of $39.4 million for First Choice
goodwill




B-113


PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008, 2007 and 2006





The
changes in the carrying amount of goodwill by reportable segment for the years
ended December 31, 2008, 2007 and 2006 were as follows:





PNM
            
            
            TNMP
      Electric
            
            
            First
      Choice
            
            
            Total
              PNMR(In
      thousands)Balance
      as of December 31, 2005
            
            $
            -
            
            
            $
            367,245
            
            
            $
            131,910
            
            
            $
            499,155Adjustments
      during 2006
            
            
            -
            
            
            
            (3,481
            )
            
            
            64
            
            
            
            (3,417
            )Balance
      as of December 31, 2006
            
            
            -
            
            
            
            363,764
            
            
            
            131,974
            
            
            
            495,738Adjustments
      during 2007
            
            
            102,775
            
            
            
            (102,643
            )
            
            
            (206
            )
            
            
            (74
            )Balance
      as of December 31, 2007
            
            
            102,775
            
            
            
            261,121
            
            
            
            131,768
            
            
            
            495,664Impairments
            
            
            (51,143
            )
            
            
            (34,456
            )
            
            
            (88,755
            )
            
            
            (174,354
            )Balance
      as of December 31, 2008
            
            $
            51,632
            
            
            $
            226,665
            
            
            $
            43,013
            
            
            $
            321,310








The
components of PNMR’s other identifiable intangible assets are as
follows:





December
      31,2008
            
            
            2007(In
      thousands)First
      Choice trade name
            
            $
            26,157
            
            
            $
            68,774First
      Choice customer list
            
            
            5,682
            
            
            
            10,480Total
      other intangible assets
            
            
            31,839
            
            
            
            79,254Accumulated
      amortization
            
            
            4,672
            
            
            
            3,362$
            27,167
            
            
            $
            75,892





Under the
provisions of SFAS 142, the Company evaluates its amortizing intangible assets
for impairment only when circumstances indicate that the intangible assets may
be impaired.  Due to conditions at First Choice described above, the
Company performed an impairment test of the First Choice customer list asset as
of December 31, 2008 and as a result, recorded a pre-tax impairment of $4.8
million ($3.1 million after-tax) for this asset.





See Note
22 for a discussion of impairments recorded by Optim Energy.





(26)
              Quarterly
      Operating Results (Unaudited)





Unaudited
operating results by quarters for 2008 and 2007 are presented below. In the
opinion of management of the Company, all adjustments (consisting of normal
recurring accruals) necessary for a fair statement of the results of operations
for such periods have been included.  On January 30, 2009, PNM
completed the sale of its gas operations, which are considered discontinued
operations and excluded from continuing operations in the tables
below.


B-114
 PNM
RESOURCES, INC. AND SUBSIDIARIES
 PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARIES
 TEXAS-NEW MEXICO POWER COMPANY
AND
SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2008, 2007 and 2006





Quarter
      EndedMarch
      31
            
            
            June
      30
            
            
            September
      30
            
            
            December
      31(In
      thousands, except per share amounts)PNMR2008Operating
      revenues
            
            $
            364,503
            
            
            $
            580,310
            
            
            $
            607,076
            
            
            $
            407,633Operating
      income (loss)
            
            
            (58,971
            )
            
            
            (122,760
            )
            
            
            33,664
            
            
            
            (81,747
            )Earnings
      (loss) from continuing operations
            
            
            (71,135
            )
            
            
            (146,248
            )
            
            
            (4,847
            )
            
            
            (83,042
            )Net
      earnings (loss)
            
            
            (48,636
            )
            
            
            (143,486
            )
            
            
            (5,485
            )
            
            
            (73,037
            )Earnings
      (Loss) from Continuing Operations per Common Share:Basic
            
            
            (0.93
            )
            
            
            (1.79
            )
            
            
            (0.06
            )
            
            
            (0.94
            )Diluted
            
            
            (0.93
            )
            
            
            (1.79
            )
            
            
            (0.06
            )
            
            
            (0.94
            )Net
      Earnings (Loss) per Common Share:Basic
            
            
            (0.63
            )
            
            
            (1.76
            )
            
            
            (0.06
            )
            
            
            (0.82
            )Diluted
            
            
            (0.63
            )
            
            
            (1.76
            )
            
            
            (0.06
            )
            
            
            (0.82
            )2007Operating
      revenues
            
            
            437,044
            
            
            
            505,569
            
            
            
            569,909
            
            
            
            401,507Operating
      income
            
            
            48,455
            
            
            
            25,896
            
            
            
            23,232
            
            
            
            27,459Earnings
      from continuing operations
            
            
            15,144
            
            
            
            21,828
            
            
            
            11,742
            
            
            
            10,644Net
      Earnings
            
            
            29,666
            
            
            
            20,240
            
            
            
            8,372
            
            
            
            16,596Earnings
      from Continuing Operations per Common Share:Basic
            
            
            0.20
            
            
            
            0.29
            
            
            
            0.15
            
            
            
            0.14Diluted
            
            
            0.19
            
            
            
            0.28
            
            
            
            0.15
            
            
            
            0.14Net
      Earnings per Common Share:Basic
            
            
            0.39
            
            
            
            0.26
            
            
            
            0.11
            
            
            
            0.22Diluted
            
            
            0.38
            
            
            
            0.26
            
            
            
            0.11
            
            
            
            0.22PNM2008Operating
      revenues
            
            $
            252,664
            
            
            $
            386,058
            
            
            $
            356,397
            
            
            $
            247,823Operating
      income (loss)
            
            
            (30,582
            )
            
            
            (29,637
            )
            
            
            47,385
            
            
            
            6,317Earnings
      (loss) from continuing operations
            
            
            (26,977
            )
            
            
            (47,008
            )
            
            
            15,934
            
            
            
            (8,423
            )Net
      earnings (loss)
            
            
            (4,610
            )
            
            
            (44,378
            )
            
            
            15,164
            
            
            
            1,4502007Operating
      revenues
            
            
            240,352
            
            
            
            300,331
            
            
            
            360,455
            
            
            
            235,836Operating
      income
            
            
            28,167
            
            
            
            4,603
            
            
            
            301
            
            
            
            900Earnings
      from continuing operations
            
            
            14,358
            
            
            
            777
            
            
            
            1,612
            
            
            
            6,644Net
      earnings (loss)
            
            
            28,748
            
            
            
            (943
            )
            
            
            (1,890
            )
            
            
            12,464TNMP2008Operating
      revenues
            
            $
            42,228
            
            
            $
            47,118
            
            
            $
            51,097
            
            
            $
            49,839Operating
      income (loss)
            
            
            10,583
            
            
            
            (21,563
            )
            
            
            15,506
            
            
            
            12,924Net
      earnings (loss)
            
            
            3,730
            
            
            
            (28,753
            )
            
            
            8,093
            
            
            
            8,1372007Operating
      revenues
            
            
            40,928
            
            
            
            43,536
            
            
            
            52,680
            
            
            
            43,277Operating
      Income
            
            
            8,107
            
            
            
            11,555
            
            
            
            21,062
            
            
            
            11,946Net
      earnings
            
            
            938
            
            
            
            4,234
            
            
            
            10,228
            
            
            
            3,008


B-115





REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To the
Board of Directors and Stockholders of


PNM
Resources, Inc. and Public Service Company of New Mexico


Albuquerque,
New Mexico





We have
audited the consolidated financial statements of PNM Resources, Inc. and
subsidiaries and Public Service Company of New Mexico and subsidiaries
(collectively, the “Companies”) as of December 31, 2008 and 2007, and for each
of the three years in the period ended December 31, 2008, and internal control
over financial reporting as of December 31, 2008, and have issued our reports
thereon dated March 2, 2009 (which reports express an unqualified opinion and
include explanatory paragraphs regarding the adoption of Statement of Financial
Accounting Standards No. 123 (revised 2004), Share-Based Paymentand
Statement of Financial Accounting Standards No. 158, Employers' Accounting for Defined
Benefit Pension and Other Postretirement Plans - an amendment of FASB Statements
No. 87, 88, 106, and 132R in 2006, the adoption of Financial Accounting
Standards Board Financial Interpretation No. 48, Accounting for Uncertainty in Income
Taxes in 2007, and the
adoption ofStatement of
Financial Accounting Standards No. 157,Fair Value
Measurementsin
2008); such consolidated financial statements and reports are included
elsewhere in this Form 10-K. Our audit also included the financial statement
schedules of the Companies listed in Item 15. The financial statement schedules
are the responsibility of the Companies’ management. Our responsibility is to
express an opinion based on our audit. In our opinion, such financial statement
schedules, when considered in relation to the basic consolidated financial
statements taken as a whole, present fairly, in all material respects, the
information set forth therein.








/s/
DELOITTE & TOUCHE LLP








Dallas,
Texas


March 2,
2009








B-116


REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




To the
Board of Directors and Stockholder of


Texas-New
Mexico Power Company


Fort
Worth, Texas





We have
audited the consolidated financial statements of Texas-New Mexico Power Company
and subsidiaries (collectively, the “Company”) as of December 31, 2008 and 2007,
and for each of the three years in the period ended December 31, 2008, and have
issued our reports thereon dated March 2, 2009 (which report expresses an
unqualified opinion and includes an explanatory paragraph relating to the
adoption of Statement of Financial Accounting Standards No. 123 (revised 2004),
Share-Based Paymentand
Statement of Financial Accounting Standards No. 158, Employers' Accounting for Defined
Benefit Pension and Other Postretirement Plans - an amendment of FASB Statements
No. 87, 88, 106, and 132R in 2006 and the adoption of Financial
Accounting Standards Board Financial Interpretation No. 48, Accounting for Uncertainty in Income
Taxes in 2007); such consolidated financial statements and report are
included elsewhere in this Form 10-K.  Our audit also included the
financial statement schedule of the Company listed in Item 15.  The
financial statement schedule is the responsibility of the Company's
management.  Our responsibility is to express an opinion based on our
audit.  In our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.








/s/
DELOITTE & TOUCHE LLP








March 2,
2009


Dallas,
Texas








B-117


SCHEDULE
I





PNM
RESOURCES, INC.


CONDENSED
FINANCIAL INFORMATION OF PARENT COMPANY


BALANCE
SHEETS





December
      31,2008
            
            
            2007(In
      thousands)AssetsCash
      and cash equivalents
            
            $
            75,095
            
            
            $
            344Intercompany
      receivables
            
            
            102,511
            
            
            
            73,556Other
      current assets
            
            
            66,250
            
            
            
            77,312Total current assets
            
            
            243,856
            
            
            
            151,212Property,
      plant and equipment, net of accumulateddepreciation of $9,731 and $8,816
            
            
            23,459
            
            
            
            24,374Long-term
      investments
            
            
            21,153
            
            
            
            24,473Investment
      in subsidiaries (including discontinued operations)
            
            
            1,805,046
            
            
            
            2,047,233Equity
      investment in Optim Energy
            
            
            239,950
            
            
            
            248,094Other
      long-term assets
            
            
            6,831
            
            
            
            8,924Total long-term assets
            
            
            2,096,439
            
            
            
            2,353,098$
            2,340,295
            
            
            $
            2,504,310Liabilities
      and Stockholders' EquityShort-term
      debt
            
            $
            160,271
            
            
            $
            358,969Current
      liabilities
            
            
            16,842
            
            
            
            31,362Total curent liabilities
            
            
            177,113
            
            
            
            390,331Long-term
      debt
            
            
            359,294
            
            
            
            358,549Other
      long-term liabilities
            
            
            57,482
            
            
            
            63,019Total liabilities
            
            
            593,889
            
            
            
            811,899Convertible
      preferred stock (no stated value, 10,000,000 shares
      authorized;issued and outstanding 477,800 and 0 shares)
            
            
            100,000
            
            
            
            -Common stock outstanding (no par value, 120,000,000 shares
      authorized:issued and outstanding 86,531,644 and 76,814,491
    shares
            
            
            1,288,168
            
            
            
            1,042,974Accumulated
      other comprehensive income, net of tax
            
            
            30,948
            
            
            
            11,208Retained
      earnings
            
            
            327,290
            
            
            
            638,229Total
      common stockholders' equity
            
            
            1,646,406
            
            
            
            1,692,411$
            2,340,295
            
            
            $
            2,504,310





See notes
to the consolidated financial statements.








B-118


PNM
RESOURCES, INC.


CONDENSED
FINANCIAL INFORMATION OF PARENT COMPANY


STATEMENTS
OF EARNINGS





Year
      ended December 31,2008
            
            
            2007
            
            
            2006(In
      thousands)Operating
      Revenues
            
            $
            -
            
            
            $
            -
            
            
            $
            -Operating
      Expenses
            
            
            23,819
            
            
            
            22,434
            
            
            
            14,592Operating income (loss)
            
            
            (23,819
            )
            
            
            (22,434
            )
            
            
            (14,592
            )Other
      Income and Deductions:Equity in earnings (loss) of subsidiaries
            
            
            (254,093
            )
            
            
            78,580
            
            
            
            148,587Equity in net earnings (loss) of Optim Energy
            
            
            (29,687
            )
            
            
            7,581
            
            
            
            -Other income
            
            
            3,355
            
            
            
            2,766
            
            
            
            3,583Other deductions
            
            
            (45,782
            )
            
            
            (47,217
            )
            
            
            (58,283
            )Net other income (deductions)
            
            
            (326,207
            )
            
            
            41,710
            
            
            
            93,887Income
      (Loss) Before Income Taxes
            
            
            (350,026
            )
            
            
            19,276
            
            
            
            79,295Income
      Tax Expense (Benefit)
            
            
            (44,754
            )
            
            
            (40,082
            )
            
            
            (28,665
            )Earnings
      (Loss) from Continuing Operations
            
            
            (305,272
            )
            
            
            59,358
            
            
            
            107,960Earnings
      from Discontinuing Operations, net of taxof $22,957, $10,394, and $8,439
            
            
            34,628
            
            
            
            15,516
            
            
            
            12,858Net
      Earnings (Loss)
            
            $
            (270,644
            )
            
            $
            74,874
            
            
            $
            120,818





See notes
to the consolidated financial statements.





B-119


SCHEDULE
I


PNM
RESOURCES, INC.


CONDENSED
FINANCIAL INFORMATION OF PARENT COMPANY


STATEMENTS
OF CASH FLOWS





Year
      Ended December 31,2008
            
            
            2007
            
            
            2006(In
      thousands)Cash
      Flows From Operating Activities:Net
      earnings (loss)
            
            $
            (270,644
            )
            
            $
            74,874
            
            
            $
            120,818Adjustments
      to reconcile net earnings (loss) to net cash flowsfrom operating activities:Depreciation and amortization
            
            
            4,249
            
            
            
            4,942
            
            
            
            509Deferred income tax expense
            
            
            (13,787)
            
            
            
            (416
            )
            
            
            4,996Equity in (earnings) loss of subsidiaries
            
            
            219,465
            
            
            
            (94,096
            )
            
            
            (161,445
            )Equity in net (earnings) loss of Optim Energy
            
            
            29,687
            
            
            
            (7,581
            )
            
            
            -Impairment of intangible assets
            
            
            -
            
            
            
            3,380
            
            
            
            -Realized loss on Altura contribution
            
            
            -
            
            
            
            3,089
            
            
            
            -Stock based compensation expense
            
            
            3,261
            
            
            
            7,557
            
            
            
            7,539Other, net
            
            
            -
            
            
            
            -
            
            
            
            676Changes in certain assets and liabilities:Other
      current assets
            
            
            10,991
            
            
            
            (1,366
            )
            
            
            10,494Other
      assets
            
            
            33
            
            
            
            3,375
            
            
            
            (974
            )Accounts
      payable
            
            
            71
            
            
            
            (641
            )
            
            
            (4,605
            )Accrued
      interest and taxes
            
            
            (3,704
            )
            
            
            (73,376
            )
            
            
            (40,475
            )Other
      current liabilities
            
            
            (3,009
            )
            
            
            42,150
            
            
            
            35,111Other
      liabilities
            
            
            (29,288
            )
            
            
            (10,099
            )
            
            
            (6,138
            )Net cash flows from operating activities
            
            
            (52,675
            )
            
            
            (48,208
            )
            
            
            (33,494
            )Cash
      Flows From Investing Activities:Additions
      to property, plant and equipment
            
            
            -
            
            
            
            (8
            )
            
            
            (5,980
            )Investments
      in subsidiaries
            
            
            -
            
            
            
            (148,349
            )
            
            
            (476,058
            )Investments
      in Optim Energy
            
            
            -
            
            
            
            (45,040
            )
            
            
            -Distributions
      from Optim Energy
            
            
            -
            
            
            
            362,282
            
            
            
            -Cash
      dividends from subsidiaries
            
            
            40,042
            
            
            
            101,300
            
            
            
            40,000Other,
      net
            
            
            -
            
            
            
            592
            
            
            
            (21,467
            )Net cash flows provided (used) in investing activities
            
            
            40,042
            
            
            
            270,777
            
            
            
            (463,505
            )Cash
      Flows From Financing Activities:Short-term
      borrowings (repayments), net
            
            
            (202,224
            )
            
            
            (158,086
            )
            
            
            319,045Long-term
      debt borrowings
            
            
            102,750
            
            
            
            -
            
            
            
            15,000Issuance
      of common stock
            
            
            250,956
            
            
            
            4,281
            
            
            
            226,098Exercise
      of employee stock options
            
            
            (1,315
            )
            
            
            (7,266
            )
            
            
            (9,641
            )Excess
      tax benefit from stock-based payment arrangements
            
            
            (560
            )
            
            
            12
            
            
            
            1,072Dividends
      paid
            
            
            (56,970
            )
            
            
            (69,807
            )
            
            
            (59,707
            )Other,
      net
            
            
            (5,253
            )
            
            
            (404
            )
            
            
            1,958Net cash flows from financing activities
            
            
            87,384
            
            
            
            (231,270
            )
            
            
            493,825Change
      in Cash and Cash Equivalents
            
            
            74,751
            
            
            
            (8,701
            )
            
            
            (3,174
            )Cash
      and Cash Equivalents at Beginning of Period
            
            
            344
            
            
            
            9,045
            
            
            
            12,219Cash
      and Cash Equivalents at End of Period
            
            $
            75,095
            
            
            $
            344
            
            
            $
            9,045Supplemental
      Cash Flow Disclosures:Interest
      paid
            
            $
            54,746
            
            
            $
            39,938
            
            
            $
            58,401Income
      taxes (refunded), net
            
            $
            (5,936
            )
            
            $
            (2,903
            )
            
            $
            (11,586
            )Supplemental
      schedule of non cash investing and financing activities:Convertible
      preferred stockissued under forward
      purchase contractupon tender of senior unsecured notes
            
            $
            100,000





See notes
to the consolidated financial statements.


B-120


SCHEDULE
II


PNM
RESOURCES, INC. AND SUBSIDIARIES


VALUATION
AND QUALIFYING ACCOUNTS





Additions
            
            
            DeductionsBalance
      at
            
            
            Charged
      to
            
            
            Charged
      tobeginning
      of
            
            
            costs
      and
            
            
            other
            
            
            
            
            
            Balance
      atDescription
            
            year
            
            
            expenses
            
            
            accounts
            
            
            Write-offs
            
            
            end
      of year(In
      thousands)(a)       
      Allowance for doubtful accounts,year ended December 31:2006
            
            $
            2,879
            
            
            $
            14,495
            
            
            $
            -
            
            
            $
            11,534
            
            
            $
            5,8402007
            
            $
            5,840
            
            
            $
            17,044
            
            
            $
            -
            
            
            $
            16,863
            
            
            $
            6,0212008
            
            $
            6,021
            
            
            $
            56,136
            
            
            $
            -
            
            
            $
            40,691
            
            
            $
            21,466








(a)
            Totals
      reflect continuing operations.

















B-121


SCHEDULE
II


PUBLIC
SERVICE COMPANY OF NEW MEXICO AND SUBSIDIARY


A
WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.


VALUATION
AND QUALIFYING ACCOUNTS





Additions
            
            
            DeductionsBalance
      at
            
            
            Charged
      to
            
            
            Charged
      tobeginning
      of
            
            
            costs
      and
            
            
            other
            
            
            
            
            
            Balance
      atDescription
            
            year
            
            
            expenses
            
            
            accounts
            
            
            Write-offs
            
            
            end
      of year(In
      thousands)(a)       
      Allowance for doubtful accounts,year ended December 31:2006
            
            $
            660
            
            
            $
            1,403
            
            
            $
            -
            
            
            $
            1,334
            
            
            $
            7292007
            
            $
            729
            
            
            $
            1,967
            
            
            $
            -
            
            
            $
            1,967
            
            
            $
            7292008
            
            $
            729
            
            
            $
            4,186
            
            
            $
            -
            
            
            $
            3,570
            
            
            $
            1,345








(a)
            Totals
      reflect continuing operations.





B-122


SCHEDULE
II


TEXAS-NEW
MEXICO POWER COMPANY AND SUBSIDIARIES


A
WHOLLY OWNED SUBSIDIARY OF PNM RESOURCES, INC.


VALUATION
AND QUALIFYING ACCOUNTS





Additions
            
            
            DeductionsBalance
      at
            
            
            Charged
      to
            
            
            Charged
      tobeginning
      of
            
            
            costs
      and
            
            
            other
            
            
            
            
            
            Balance
      atDescription
            
            year
            
            
            expenses
            
            
            accounts
            
            
            Write-offs
            
            
            end
      of year(In
      thousands)Allowance
      for doubtful accounts,year
      ended December 31:2006
            
            $
            100
            
            
            $
            25
            
            
            $
            -
            
            
            $
            94
            
            
            $
            312007
            
            $
            31
            
            
            $
            3
            
            
            $
            -
            
            
            $
            34
            
            
            $
            -2008
            
            $
            -
            
            
            $
            144
            
            
            $
            -
            
            
            $
            144
            
            
            $
            -

















B-123


ITEM
      9.
            CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE





None.





ITEM
      9A.
            CONTROLS
      AND PROCEDURES





PNMR





(a)
Evaluation of disclosure controls and procedures.





PNMR
maintains disclosure controls and procedures designed to ensure that it is able
to collect the information it is required to disclose in the reports it files
with the SEC, and to process, summarize and disclose this information within the
time periods specified in the rules of the SEC.   Based on an
evaluation of PNMR’s disclosure controls and procedures as of the end of the
period covered by this report conducted by management, with the participation of
the Chief Executive Officer and Chief Financial Officer, the Chief Executive
Officer and Chief Financial Officer believe that these controls and procedures
are effective to ensure that PNMR meets the requirements of SEC Regulation 13A,
Rule 13a-15(e) and Rule 15d-15(e).





(b)
Management’s report on internal control over financial reporting.





“Management’s
Annual Report on Internal Control Over Financial Reporting” appears on page B-2.
This report is incorporated by reference herein.





(c)
Changes in internal controls.





There
have been no changes in PNMR’s internal controls over financial reporting for
the quarter ended December 31, 2008, that have materially affected, or are
reasonably likely to materially affect, PNMR’s internal control over financial
reporting, except:





PNMR has
selected Cognizant to provide outsourced application maintenance and support
services for selected applications related to customer service, complex billing,
electronic data interchange, and ancillary applications.





PNM





(a)
Evaluation of disclosure controls and procedures.





PNM
maintains disclosure controls and procedures designed to ensure that it is able
to collect the information it is required to disclose in the reports it files
with the SEC, and to process, summarize and disclose this information within the
time periods specified in the rules of the SEC. Based on an evaluation of PNM’s
disclosure controls and procedures as of the end of the period covered by this
report conducted by management, with the participation of the Chief Executive
Officer and Chief Financial Officer, the Chief Executive Officer and Chief
Financial Officer believe that these controls and procedures are effective to
ensure that PNM is able to meet the requirements of SEC Regulation 13A, Rule
13a-15(e) and Rule 15d-15(e).





(b)
Management’s report on internal control over financial reporting.





“Management’s
Annual Report on Internal Control Over Financial Reporting” appears on page B-3.
This report is incorporated by reference herein.





(c)
Changes in internal controls.





There
have been no changes in PNM’s internal controls over financial reporting for the
quarter ended December 31, 2008, that have materially affected, or are
reasonably likely to materially affect, PNM’s internal control over financial
reporting, except:




C-1




PNM has
selected Cognizant to provide outsourced application maintenance and support
services for selected applications related to customer service, complex billing,
electronic data interchange, and ancillary applications.





TNMP





(a)
Evaluation of disclosure controls and procedures.





TNMP
maintains disclosure controls and procedures designed to ensure that it is able
to collect the information it is required to disclose in the reports it files
with the SEC, and to process, summarize and disclose this information within the
time periods specified in the rules of the SEC.  Based on an
evaluation of TNMP’s disclosure controls and procedures as of the end of the
period covered by this report conducted by management, with the participation of
the Chief Executive Officer and Chief Financial Officer, the Chief Executive
Officer and Chief Financial Officer believe that these controls and procedures
are effective to ensure that TNMP meets the requirements of SEC Regulation 13A,
Rule 13a-15(e) and Rule 15d-15(e).





(b)
Management’s report on internal control over financial reporting.





“Management’s
Annual Report on Internal Control Over Financial Reporting” appears on page B-4.
This report is incorporated by reference herein.





(c)
Changes in internal controls.





There
have been no changes in TNMP’s internal controls over financial reporting for
the quarter ended December 31, 2008, that have materially affected, or are
reasonably likely to materially affect, TNMP’s internal control over financial
reporting, except:





TNMP has
selected Cognizant to provide outsourced application maintenance and support
services for selected applications related to customer service, complex billing,
electronic data interchange, and ancillary applications.





ITEM
      9B.
            OTHER
      INFORMATION





None.





PART
III





ITEM
      10.
            DIRECTORS,
      EXECUTIVE OFFICERS OF THE COMPANY AND CORPORATE
  GOVERNANCE





Reference
is hereby made to “Proposal 1:  Elect Ten Directors” in PNMR’s Proxy
Statement relating to the annual meeting of stockholders to be held on May 19,
2009 (the “2009 Proxy Statement”), to PART I, SUPPLEMENTAL ITEM - “EXECUTIVE OFFICERS OF THE
COMPANY” in this Form 10-K, “Other Matters” - “Section 16(a) Beneficial
Ownership Reporting Compliance”, “Code of Ethics” and “Board Committees and
Their Functions”-“Audit and Ethics Committee” in the 2009 Proxy
Statement.  The Company intends to satisfy the disclosure requirements
of Form 8-K relating to amendments to the Company’s code of ethics applicable to
its senior executive and financial officers by posting such information on its
Internet website.  Information about the Company’s website is included
under Part I, Item 1 - “Company Website.”





PNMR’s
common stock is listed on the New York Stock Exchange. As a result, PNMR’s Chief
Executive Officer is required to make an annual certification to the New York
Stock Exchange stating that he was not aware of any violations by PNMR of the
New York Stock Exchange corporate governance listing
standards.  PNMR’s Chief Executive Officer made the most recent
certification to the New York Stock Exchange on June 9, 2008.





C-2


ITEM
11.                       EXECUTIVE
COMPENSATION





Reference
is hereby made to “Executive Compensation”, and all subheadings thereunder from
“Compensation Discussion and Analysis” to “Potential Payments Upon Termination
or Change in Control”, “Director Compensation”, and “Board Committees and Their
Functions”-“Board Governance and Human Resources Committee”-“Interlocks” in the
2009 Proxy Statement.





ITEM
      12.
            SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS





Reference
is hereby made to “PNM Resources Common Stock Owned by Executive Officers and
Directors,” “Ownership of More Than Five Percent of PNM Resources Common Stock”
and “Equity Compensation Plan Information” in the 2009 Proxy
Statement.





ITEM
      13.
            CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
      INDEPENDENCE





Reference
is hereby made to “Related Person Transactions” and “Director Independence” in
the 2009 Proxy Statement.





ITEM
      14.
            PRINCIPAL
      ACCOUNTANT FEES AND SERVICES





Reference
is hereby made to “Audit and Ethics Committee Report” and “Independent Auditor
Fees” in the 2009 Proxy Statement.  Independent auditor fees for PNM
and TNMP are reported in the 2009 Proxy Statement for PNMR.  All such
fees are fees of PNMR.


C-3





PART
      IV





ITEM
      15.
            EXHIBITS,
      FINANCIAL STATEMENT SCHEDULES





(a) -
      1.
            See
      Index to Financial Statements under Item
8.


(a)
      -
    2.
            Financial
      Statement Schedules for the years 2008, 2007, and 2006 are omitted for the
      reason that they are not required or the information is otherwise supplied
      under Item 8.





(a) -
3-A.                 Exhibits
Filed:





Exhibit
      No.
            
            Description10.1**
            PNMR
            PNM
      Resources, Inc. 2008 Officer Incentive Plan (amended December 16,
      2008)10.2**
            PNMR
            First
      Amendment to the PNM Resources, Inc. Long-Term Performance Cash Program
      executed December 8, 200810.3**
            PNMR
            First
      Amendment to the PNM Resources, Inc. Non-Union Severance Pay Plan executed
      November 20, 200810.4**
            PNMR
            Seventh
      Amendment to the PNM Resources, Inc.  Accelerated Management
      Performance Plan executed November 21, 200810.5**
            PNMR
            PNM
      Resources, Inc. After-Tax Retirement Plan effective January 1,
      200910.6**
            PNMR
            First
      Amendment to the PNM Resources, Inc. Executive Savings Plan executed
      December 17, 200810.7**
            PNMR
            Third
      Amendment to the PNM Resources, Inc. Executive Spending Account Plan
      effective January 1, 200910.8**
            PNMR
            First
      Amendment to the PNM Resources, Inc. Officer Retention Plan executed
      November 20, 200810.9**
            PNMR
            Supplemental
      Employee Retirement Agreement for Jeffry E. Sterba (amended and restated
      effective January 1, 2009)10.10**
            PNMR
            Third
      Amendment to the PNM Resources, Inc. Officer Life Insurance Plan effective
      January 1, 200910.11**
            PNMR
            First
      Amendment to the Retention Bonus Agreement between PNMR and Jeffry E.
      Sterba effective January 1, 200910.12**
            PNMR
            Second
      Amendment to the PNM Resources, Inc. Amended and Restated Omnibus
      Performance Equity Plan effective January 1, 200910.13**
            PNMR
            Third
      Amendment to the PNM Resources, Inc.  Amended and Restated
      Omnibus Performance Equity Plan effective January 1,
  200910.14**
            PNMR
            Changes
      in Director Compensation10.15**
            PNMR
            Fourth
      Amendment to the PNM Resources, Inc. Officer Life Insurance Plan effective
      January 1, 200912.1
            PNMR
            Ratio
      of Earnings to Fixed Charges12.2
            PNM
            Ratio
      of Earnings to Fixed Charges




D-1


12.3
            TNMP
            Ratio
      of Earnings to Fixed Charges21
            PNMR
            Certain
      subsidiaries of PNM Resources, Inc.23.1
            PNMR
            Consent
      of Deloitte & Touche LLP for PNM Resources, Inc.23.2
            PNM
            Consent
      of Deloitte & Touche LLP for Public Service Company of New
      Mexico23.3
            TNMP
            Consent
      of Deloitte & Touche LLP for Texas-New Mexico Power
      Company31.1
            PNMR
            Chief
      Executive Officer Certification Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200231.2
            PNMR
            Chief
      Financial Officer Certification Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200231.3
            PNM
            Chief
      Executive Officer Certification Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200231.4
            PNM
            Chief
      Financial Officer Certification Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200231.5
            TNMP
            Chief
      Executive Officer Certification Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200231.6
            TNMP
            Chief
      Financial Officer Certification Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200232.1
            PNMR
            Chief
      Executive Officer Certification Pursuant to Section 906 of the
      Sarbanes-Oxley Act of 200232.2
            PNMR
            Chief
      Financial Officer Certification Pursuant to Section 906 of the
      Sarbanes-Oxley Act of 200232.3
            PNM
            Chief
      Executive Officer Certification Pursuant to Section 906 of the
      Sarbanes-Oxley Act of 200232.4
            PNM
            Chief
      Financial Officer Certification Pursuant to Section 906 of the
      Sarbanes-Oxley Act of 200232.5
            TNMP
            Chief
      Executive Officer Certification Pursuant to Section 906 of the
      Sarbanes-Oxley Act of 200232.6
            TNMP
            Chief
      Financial Officer Certification Pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002








(a) - 3-B.  Exhibits
Incorporated By Reference:





The
documents listed below are being filed (as shown above) or have been previously
filed on behalf of PNM Resources, PNM or TNMP and are incorporated by reference
to the filings set forth below pursuant to Exchange Act Rule 12b-32 and
Regulation S-K section 10, paragraph (d).


D-2





Exhibit No.
            Description of Exhibit
            
            Filed as Exhibit:
            Registrant(s)File No:Plan
      of Acquisition2.0
            Asset
      Purchase Agreement dated January 12, 2008 among PNM, Continental Energy
      Systems, LLC and New Mexico Gas Company, Inc.
            
            2.0
      to PNM’s Annual Report on Form 10-K for the year ended December 31,
      2007
            1-6986
              PNM2.1
            Agreement
      and Plan of Merger among PNM Resources, PNM Merger Sub LLC, Continental
      Energy Systems, LLC and Cap Rock Holding Corporation dated as of January
      12, 2008
            
            2.1
      to the Company’s Annual Report on Form 10-K for the year ended December
      31, 2007
            1-32462
              PNMR2.2
            Contribution
      Agreement, dated as of June 1, 2007, among EnergyCo, LLC, PNM Resources,
      and ECJV Holdings, LLC
            
            2.1
      to the Company’s Quarterly Report on Form 10-Q for the quarter ended June
      30, 2007
            1-32462
              PNMR2.3
            Purchase
      and Sale Agreement, dated as of January 14, 2006 among Twin Oaks Power LP,
      Twin Oaks Power III, LP, Sempra Energy, Altura Power L.P. and PNM
      Resources (Confidential treatment was requested for portions of the
      exhibit, and such portions were omitted from this exhibit filed and were
      filed separately with the Securities and Exchange
    Commission)
            
            2.1
      to the Company’s Annual Report on Form 10-K for the year ended December
      31, 2005
            1-32462
              PNMRArticles
      of Incorporation and By-laws3.1
            Articles
      of Incorporation of PNM Resources, as amended to date (Certificate of
      Amendment dated October 27, 2008 and Restated Articles of Incorporation
      dated August 3, 2006)
            
            3.1
      to the Company’s Current Report on Form 8-K filed November 21,
      2008
            1-32462
              PNMR3.2
            Restated
      Articles of Incorporation of PNM, as amended through May 31,
      2002
            
            3.1.1
      to the Company’s Quarterly Report on Form 10-Q for the quarter ended June
      30, 2002
            1-6986
              PNM3.3
            Articles
      of Incorporation of TNMP, as amended through July 7, 2005
            
            3.1.2
      to the Company’s Quarterly Report on Form 10-Q for the quarter ended June
      30, 2005
            2-97230
              TNMP3.4
            Bylaws
      of PNM Resources, Inc. with all amendments to and including February 17,
      2009
            
            3.1
      to the Company’s Current Report on Form 8-K filed February 20,
      2009
            1-32462
              PNMR3.5
            Bylaws
      of PNM with all amendments to and including May 31, 2002
            
            3.1.2
      to the Company’s Report on Form 10-Q for the fiscal quarter ended June 30,
      2002
            1-6986
              PNM3.6
            Bylaws
      of TNMP as adopted on August 4, 2005
            
            3.2.3
      to the Company’s Quarterly Report on Form 10-Q for the quarter ended June
      30, 2005
            2-97230
              TNMP




D-3




Exhibit No.
            Description of Exhibit
            
            Filed as Exhibit:
            Registrant(s)File
      No:Indentures‡PNMR4.1
            Purchase
      Contract and Pledge Agreement, dated as of March 30, 2005, among PNMR,
      JPMorgan Chase Bank, N.A., as Purchase Contract Agent, and U.S. Bank Trust
      National Association, as Collateral Agent, Custodial Agent and Securities
      Intermediary, with Form of Corporate Unit included as Exhibit A and Form
      of Treasury Unit included as Exhibit B thereto
            
            10.1
      to PNMR’s Current Report on Form 8-K filed March 31, 2005
            1-32462
              PNMR4.2
            Indenture,
      dated as of March 15, 2005, between PNMR and JPMorgan Chase Bank, N.A., as
      Trustee
            
            10.2
      to PNMR’s Current Report on Form 8-K filed March 31, 2005
            1-32462
              PNMR4.3
            Supplemental
      Indenture No. 1, dated as of March 30, 2005, between the Company and
      JPMorgan Chase Bank, N.A. as Trustee, with Form of Senior Note included as
      Exhibit A thereto
            
            10.3
      to PNMR’s Current Report on Form 8-K filed March 31, 2005
            333-32170
              PNMR4.4
            Supplemental
      Indenture No. 2, dated as of May 16, 2008 between PNMR and The Bank of New
      York Trust Company, N.A. (successor to JPMorgan Chase Bank, N.A.), as
      trustee
            
            4.3
      to PNMR’s Current Report on Form 8-K filed May 21, 2008
            1-32462
              PNMR4.5
            Remarketing
      Agreement, dated as of March 30, 2005, among PNMR, Banc of America
      Securities LLC, as Remarketing Agent, and JPMorgan Chase Bank, N.A., as
      Purchase Contract Agent
            
            10.4
      to PNMR’s Current Report on Form 8-K filed March 31, 2005
            1-32462
              PNMR4.6
            Supplemental
      Remarketing Agreement dated May 6, 2008 among PNMR, the remarketing agents
      named therein and The Bank of New York, solely as agent and as
      attorney-in-fact
            
            1.1
      to the Company’s Current Report on form 8-K filed May 12,
    20084.7
            Underwriting
      Agreement dated May 9, 2008 among PNMR and Lehman Brothers Inc. and
      Merrill Lynch, Pierce, Fenner & Smith Incorporated, as representatives
      of the Underwriters named therein
            
            1.3
      to the Company’s Current Report on Form 8-K filed May 12,
    20084.8
            Purchase
      Contract Agreement, dated as of October 7, 2005, between PNMR and U.S.
      Bank National Association, as purchase contract agent, with Form of
      Corporate Unit included as Exhibit A and Form of Treasury Unit included as
      Exhibit B thereto
            
            4.10
      to the Company’s Quarterly Report on Form 10-Q for the quarter ended
      September 30, 2005
            1-32462
              PNMR




D-4




Exhibit No.
            Description of Exhibit
            
            Filed as
      Exhibit:
            Registrant(s) File No:4.9
            Amended
      and Restated Purchase Contract Agreement dated as of August 4, 2008,
      between PNMR and U.S. Bank National Association, as purchase contract
      agent
            
            4.1
      to the Company’s Quarterly Report on Form 10-Q for the quarter ended
      September 30, 2008
            1-32462
              PNMR4.10
            Pledge
      Agreement, dated as of October 7, 2005, between PNMR and U.S. Bank
      National Association
            
            4.6
      to the Company’s Annual Report on Form 10-K for the year ended December
      31, 2005
            1-32462
              PNMR4.11
            Amended
      and Restated Pledge Agreement, dated as of August 4, 2008, between PNMR
      and U.S. Bank National Association
            
            4.2
      to the Company’s Quarterly Report on Form 10-Q for the quarter ended
      September 30, 2008
            2-43573
              PNMR4.12
            Indenture,
      dated as of October 7, 2005, between PNMR and U.S. Bank National
      Association, as trustee
            
            4.11
      to the Company’s Quarterly Report on Form 10-Q for the quarter ended
      September 30, 2005
            1-32462
              PNMR4.13
            Supplemental
      Indenture, dated as of October 7, 2005, between PNMR and U.S. Bank
      National Association, as trustee, with Form of Senior Note included as
      Exhibit A thereto
            
            4.12
      to the Company’s Quarterly Report on Form 10-Q for the quarter ended
      September 30, 2005
            1-32462
              PNMR4.14
            Supplemental
      Indenture No. 2, dated as of August 4, 2008 between PNMR and U.S. Bank
      National Association, as trustee
            
            4.3
      to PNMR’s Quarterly Report on Form 10-Q for the quarter ended September
      30, 2008
            1-32462
              PNMR4.15
            Remarketing
      Agreement, dated as of October 7, 2005, among PNMR, Banc of America
      Securities LLC, as remarketing agent and U.S. Bank National Association as
      purchase contract agent.
            
            4.9
      to the Company’s Annual Report on Form 10-K for the year ended December
      31, 2005
            1-32462
              PNMR4.16
            Supplemental
      Remarketing Agreement dated November 7, 2008 among PNMR, remarketing
      agents named therein and U.S. Bank National Association, as purchase
      contract agent
            
            10.1
      to PNMR’s Current Report on Form 8-K filed November 13,
    2008
            1-32462
              PNMR4.17
            Registration
      Rights Agreement, dated as of October 7, 2005, between PNMR, as issuer and
      Cascade Investment, LLC, as initial holder.
            
            4.10
      to the Company’s Annual Report on Form 10-K for the year ended December
      31, 2005
            1-32462
              PNMR


D-5





PNM4.18
            Indenture
      of Mortgage and Deed of Trust dated as of June 1, 1947, between PNM and
      The Bank of New York (formerly Irving Trust Company), as Trustee, together
      with the Ninth Supplemental Indenture dated as of January 1, 1967, the
      Twelfth Supplemental Indenture dated as of September 15, 1971, the
      Fourteenth Supplemental Indenture dated as of December 1, 1974 and the
      Twenty-Second Supplemental Indenture dated as of October 1, 1979 thereto
      relating to First Mortgage Bonds of PNM
            
            4-(d)
      to PNM’s Registration Statement No. 2-99990
            2-99990
              PNM4.19
            Fifty-third
      Supplemental Indenture, dated as of March 11, 1998, supplemental to
      Indenture of Mortgage and Deed of Trust, dated as of June 1, 1947, between
      PNM and The Bank of New York(formerly Irving Trust Company), as
      trustee
            
            4.3
      to PNM’s Quarterly Report on Form 10-Q for the quarter ended March 31,
      1998
            1-6986
              PNM4.20
            Indenture
      (for Senior Notes), dated as of March 11, 1998, between PNM and The Chase
      Manhattan Bank, as Trustee
            
            4.4
      to PNM’s Quarterly Report on Form 10-Q for the quarter ended March 31,
      1998
            1-6986
              PNM4.21
            First
      Supplemental Indenture, dated as of March 11, 1998, supplemental to
      Indenture, dated as of March 11, 1998, Between PNM and The Chase Manhattan
      Bank, as Trustee
            
            4.5
      to PNM’s Quarterly Report on Form 10-Q for the quarter ended March 31,
      1998
            1-6986
              PNM4.22
            Second
      Supplemental Indenture, dated as of March 11, 1998, supplemental to
      Indenture, dated as of March 11, 1998, Between PNM and The Chase Manhattan
      Bank, as Trustee
            
            4.6
      to PNM’s Quarterly Report on Form 10-Q for the quarter ended March 31,
      1998
            1-6986
              PNM4.23
            Third
      Supplemental Indenture, dated as of October 1, 1999 to Indenture dated as
      of March 11, 1998, between PNM and The Chase Manhattan Bank, as
      Trustee
            
            4.6.1
      to PNM’s Annual Report on Form 10-K for the fiscal year ended December 31,
      1999
            1-6986
              PNM4.24
            Fourth
      Supplemental Indenture, dated as of May 1, 2003 to Indenture dated as of
      March 11, 1998, between PNM and JPMorgan Chase Bank (formerly The Chase
      Manhattan Bank), as Trustee
            
            4.6.2
      to PNM’s Quarterly Report on Form 10-Q for the quarter ended June 30,
      2003
            1-6986
              PNM4.25
            Fifth
      Supplemental Indenture, dated as of May 1, 2003 to Indenture dated as of
      March 11, 1998, between PNM and JPMorgan Chase Bank, as
      Trustee
            
            4.6.3
      to PNM’s Quarterly Report on Form 10-Q for the quarter ended June 30,
      2003
            1-6986
              PNM


D-6





4.26
            Sixth
      Supplemental Indenture, dated as of May 1, 2003 to Indenture dated as of
      March 11, 1998, between PNM and JPMorgan Chase Bank, as
      Trustee
            
            4.6.4
      to PNM’s Quarterly Report on Form 10-Q for the quarter ended June 30,
      2003
            1-6986
              PNM4.27
            Seventh
      Supplemental Indenture, dated as of June 1, 2007 to Indenture dated as of
      March 11, 1998, between PNM and The Bank of New York Trust Company, N.A.
      (successor to JPMorgan Chase Bank), as Trustee
            
            4.23
      to PNM’s Quarterly Report on Form 10-Q for the quarter ended June 30,
      2007
            1-6986
              PNM4.28
            Indenture
      (for Senior Notes), dated as of August 1, 1998, between PNM and The Chase
      Manhattan Bank, as Trustee
            
            4.1
      to PNM’s Registration Statement No. 33-53367
            333-53367
              PNM4.29
            First
      Supplemental Indenture, dated August 1, 1998, supplemental to Indenture,
      dated as of August 1, 1998, between PNM and The Chase Manhattan Bank, as
      Trustee
            
            4.3
      to PNM’s Current Report on Form 8-K Dated August 7, 1998
            1-6986
              PNM4.30
            Second
      Supplemental Indenture, dated September 1, 2003, supplemental to
      Indenture, dated as of August 1, 1998, between PNM and JPMorgan Chase Bank
      (formerly, The Chase Manhattan Bank), as Trustee
            
            4.7.1
      to PNM’s Quarterly Report on Form 10-Q for the quarter ended September 30,
      2003
            1-6986
              PNM4.31
            Third
      Supplemental Indenture, dated as of May 13, 2008 between PNM and The Bank
      of New York Trust Company, N.A. as trustee
            
            4.2
      to PNM’s Current Report on Form 8-K filed May 15, 2008
            1-6986
              PNM4.32
            Underwriting
      Agreement dated May 8, 2008 among PNM and Lehman Brothers Inc. and Merrill
      Lynch, Pierce, Fenner & Smith Incorporated, as representatives of the
      Underwriters named therein
            
            1.2
      to the Company’s Current Report on Form 8-K filed May 12,
    2008TNMP4.33
            Indenture,
      dated January 1, 1999 between TNMP and JPMorgan Chase Bank (successor to
      The Chase Bank of Texas, N. A.), as Trustee
            
            4(w)
      to TNMP’s Annual Report on Form 10-K for the year ended December 31,
      1998
            2-97230
              TNMP4.34
            First
      Supplemental Indenture, dated January 1, 1999, to Indenture, dated January
      1, 1999, between TNMP and JPMorgan Chase Bank (successor to The Chase Bank
      of Texas, N. A.), as Trustee
            
            4(x)
      to TNMP’s Annual Report on Form 10-K for the year ended December 31,
      1998
            2-97230
              TNMP4.35
            Second
      Supplemental Indenture, dated June 1, 2003, to Indenture, dated January 1,
      1999, between TNMP and JPMorgan Chase Bank (successor to The Chase Bank of
      Texas, N. A.), as Trustee
            
            4
      to TNMP’s Quarterly Report on Form 10-Q for the quarter ended June 30,
      2003
            2-97230
              TNMP




D-7




Material
      Contracts10.1
            Amended
      and Restated Credit Agreement, dated as of August 15, 2005, among PNM
      Resources, Inc. and First Choice Power, L.P., as borrowers, the lenders
      party thereto, Bank of America, N.A., as administrative agent and Wachovia
      Bank, National Association, as syndication agent.
            
            10.1
      to the Company’s Current Report on Form 8-K filed August 19,
      2005
            1-32462
              PNMR10.2
            First
      Amendment to Credit Agreement dated as of November 3, 2006 among PNM
      Resources, First Choice Power, L.P. and TNMP, as borrowers, the lenders
      party thereto and Bank of America, N.A., as administrative
      agent
            
            10.2
      to the Company’s Annual Report on Form 10-K for the year ended December
      31, 2006
            1-32462
              PNMR10.3
            Second
      Amendment to Credit Agreement dated as of December 20, 2006 among PNM
      Resources, First Choice Power, L.P. and TNMP, as borrowers, the lenders
      party thereto and Bank of America, N.A., as administrative
      agent
            
            10.3
      to the Company’s Quarterly Report on Form 10-Q for the quarter ended March
      31, 2007
            1-32462
              PNMR10.4
            Consent
      Agreement, dated as of August 11, 2008, among PNMR, First Choice Power,
      L.P., the lenders party thereto and Bank of America, N.A., as
      Administrative Agent for the lenders named therein
            
            10.1
      to PNMR’s Current Report on 8-K filed August 13, 2008
            1-32462
      Form10.5
            Amended
      and Restated Guaranty Agreement, dated as of August 15, 2005, executed by
      PNM Resources, Inc., as Guarantor
            
            10.1
      to the Company’s Current Report on Form 8-K filed August 19,
      2005
            1-32462
              PNMR10.6
            Joinder
      Agreement, dated as of September 30, 2005, between TNMP, as borrower and
      Bank of America, as administrative agent
            
            10.3
      to the Company’s Quarterly Report on Form 10-Q for the quarter ended
      September 30, 2005
            2-97230
              TNMP10.7
            Term
      Loan Agreement, dated April 17, 2006, among PNM Resources, as borrower,
      the lenders identified therein and Lehman Commercial Paper, Inc., as
      administrative agent
            
            10.4
      to PNM Resource’s Quarterly Report on Form 10-Q for the quarter ended June
      30, 2006
            1-32462
              PNMR10.8
            Unit
      Purchase Agreement dated as of August 13, 2004 between PNM Resources and
      Cascade Investment, L.L.C.
            
            99
      to PNM Resources’ Current Report on Form 8-K filed August 19,
      2004
            333-32170
              PNMR10.9
            First
      Supplement to Unit Purchase Agreement, dated as of June 4, 2005, between
      PNMR and Cascade
            
            99.2
      to the Company’s Current Report on Form 8-K filed June 10,
      2005
            1-32462
              PNMR


D-8





10.10
            Second
      Supplement to Unit Purchase Agreement, dated as of July 1, 2005, between
      PNMR and Cascade
            
            99.1
      to the Company’s Current Report on Form 8-K filed July 8,
    2005
            1-32462
              PNMR10.11
            Third
      Supplement to Unit Purchase Agreement, dated as of August 12, 2005,
      between PNMR and Cascade and Fourth Supplement to Unit Purchase Agreement,
      dated as of September 30, 2005, between PNMR and Cascade
            
            10.4
      and 10.5 to the Company’s Quarterly Report on Form 10-Q for the quarter
      ended September 30, 2005
            1-32462
              PNMR10.12
            Credit
      Agreement dated as of August 17, 2005, among PNM, the lenders party
      thereto, Wachovia Bank, National Association, as administrative agent and
      Union Bank of California, N.A., as syndication agent
            
            10.3
      to the Company’s Current Report on Form 8-K filed August 19,
      2005
            1-6986
              PNM10.13
            Consent
      Agreement, dated as of August 12, 2008, among PNM, the lenders party
      thereto, and Wachovia Bank, National Association, as Administrative Agent
      for the lenders named therein
            
            10.2
      to PNM’s Current Report on Form 8-K filed August 13, 2008
            1-6986
              PNM10.14
            Delayed
      Draw Term Loan Agreement, dated as of May 5, 2008, among PNM, as
      borrower, the lenders party thereto and Merrill Lynch Capital Corporation,
      as administrative agent
            
            10.1
      to PNM’s Current Report on Form 8-K filed May 7, 2008
            1-6986
              PNM10.15
            First
      Amendment to the Delayed Draw Term Loan Agreement, dated as of August 7,
      2008, among PNM, the lenders party thereto and certain other
      parties
            
            10.3
      to PNM’s Current Report on Form 8-K filed August 13, 2008
            1-6986
              PNM10.16
            Reimbursement
      Agreement, dated as of May 8, 2008, among PNM, as borrower, the lenders
      party thereto, Deutsche Bank AG New York Branch, as administrative agent
      and RBC Capital Markets as syndication agent.
            
            10.1
      to PNM’s Current Report on Form 8-K filed May 9, 2008
            1-6986
              PNM10.17
            First
      Amendment to the Reimbursement Agreement, dated as of August 7, 2008,
      among PNM, the lenders party thereto and Deutsche Bank AG New York Branch
      as Administrative Agent
            
            10.4
      to PNM’s Current Report on Form 8-K filed August 13, 2008
            1-6986
              PNM10.18
            Transitional
      Services Agreement among PNM, PNMR Services Company and New Mexico Gas
      Company, Inc. dated as of January 12, 2008
            
            10.12
      to PNM’s Annual Report on Form 10-K for the year ended December 31,
      2007
            1-6986
              PNM




D-9




10.19
            Term
      Loan Agreement, dated as of March 7, 2008, among TNMP, as borrower, the
      lenders named therein, and JPMorgan Chase Bank, N.A., as administrative
      agent
            
            10.1
      to TNMP’s Quarterly Report on Form 10-Q for the quarter ended March 31,
      2008
            2-97230
              TNMP10.20
            Amendment
      No. 1 to Term Loan Credit Agreement, entered into as of May 15, 2008 among
      TNMP, as Borrower, JPMorgan Chase Bank, N.A., as Administrative Agent and
      as a Lender, and Union Bank of California, N.A., as a Lender
            
            10.1
      to TNMP’s Current Report on Form 8-K filed October 16,
2008
            2-97230
              TNMP10.21
            Credit
      Agreement, dated as of May 15, 2008, among TNMP, the lenders named
      therein, JPMorgan Chase Bank, N.A., as administrative agent, and Union
      Bank Of California, N.A., as syndication agent
            
            4.4
      to TNMP’s Current Report on Form 8-K filed May 21, 2008
            2-97230
              TNMP10.22
            Credit
      Agreement, dated as of October 31, 2008, among TNMP, as borrower, Union
      Bank of California, N.A., as administrative agent and as a lender, and
      JPMorgan, as a lender
            
            10.1
      to TNMP’s Current report on Form 8-K filed November 3,
2008
            2-97230
              TNMP10.23**
            PNM
      Resources, Inc. Amended and Restated Omnibus Performance Equity Plan dated
      May 17, 2005 (“PEP”)
            
            4.1
      to PNM Resources’ Form S-8 Registration Statement filed May 17,
      2005
            333-125010
              PNMR10.24**
            Second
      Amendment to the PNM Resources, Inc. Amended and Restated Omnibus
      Performance Equity Plan effective January 1, 2009
            
            10.12
      to PNMR’s Annual Report on Form 10-K for the fiscal year ended December
      31, 2008
            1-32462
              PNMR10.25**
            Third
      Amendment to the PNM Resources, Inc. Amended and Restated Omnibus
      Performance Equity Plan effective January 1, 2009
            
            10.13
      to PNMR’s Annual Report on Form 10-K for the fiscal year ended December
      31, 2008
            1-32462
              PNMR10.26**
            Form
      of the award agreement for non-qualified stock options granted on and
      after 2007 under the PEP
            
            10.2
      to the Company's Current Report on Form 8-K filed February 16,
      2007
            1-32462
              PNMR10.27**
            Form
      of award agreement for restricted stock rights granted on and after 2007
      under the PEP
            
            10.3
      to the Company’s Current Report on Form 8-K filed February 16,
      2007
            1-32462
              PNMR10.28**
            Form
      of award agreement for performance shares granted for the 2004-2006
      performance period under the PEP and a description of the Long-Term
      Performance Share Program Amended Effective January 1,
2004
            
            10.4
      to PNM Resources' Current Report on Form 8-K filed February 16,
      2007
            1-32462
              PNMR10.29**
            Long-Term
      Performance Cash Program description effective January 1,
    2004
            
            10.5
      to PNM Resources' Current Report on Form 8-K filed February 16,
      2007
            333-125010
              PNMR






D-10


10.30**
            First
      Amendment to Long-Term Performance Loan Plan Program executed December 8,
      2008
            
            10.2
      to PNMR’s Annual Report on Form 10-K for fiscal year ended December 31,
      2008
            1-32462
              PNMR10.31**
            Changes
      in Director Compensation
            
            10.14
      to the Company’s Annual Report on Form 10-K for the fiscal year ended
      December 31, 2008
            1-32462
              PNMR10.32**
            PNM
      Resources, Inc. Executive Savings Plan dated December 29,
    2003
            
            10.75
      to PNM Resources and PNM’s Annual Report on Form 10-K for the fiscal year
      ended December 31, 2003
            333-32170
              PNMR10.33**
            First
      Amendment to PNMR’s Executive Savings Plan executed December 17,
      2008
            
            10.6
      to PNMR’s Annual Report on Form 10-K for he fiscal year ended December 31,
      2008
            1-32462
              PNMR10.34**
            PNM
      Resources, Inc. Executive Savings Plan II (amended and restated effective
      January 1, 2009)
            
            4.1
      to PNMR’s Registration Statement on Form S-8 (333-156243) filed December
      17, 2008
            333-156243
              PNMR10.35**
            PNM
      Resources, Inc. After-Tax Retirement Plan effective January 1,
      2009
            
            10.5
      to PNMR’s Annual Report on Form 10-K for he fiscal year ended December 31,
      2008
            1-32462
              PNMR10.36**
            2007
      Officer Incentive Plan
              (suspended
      October 25, 2007)
            
            10.6
      to PNM Resources' Current Report on Form 8-K filed February 16,
      2007
            1-32462
              PNMR10.37**
            2008
      Officer Incentive Plan (as amended December 16, 2008)
            
            10.1
      to the Company’s Annual Report on Form 10-K for the fiscal year ended
      December 31, 2008
            1-32462
              PNMR10.38**
            Performance
      Cash Program for the Utilities President (Patricia K.
    Collawn)
            
            10.2
      to the Company’s Quarterly Report on Form 10-Q for the quarter ended June
      30, 2008
            1-32462
              PNMR10.39**
            Summary
      of Executive Time Off Policy Effective January 1, 2006
            
            10.31
      to the Company’s Quarterly Report on Form 10-Q for the quarter ended
      September 30, 2005
            1-32462
              PNMR


10.40**
            Restated
      and Amended Public Service Company of New Mexico Accelerated Management
      Performance Plan (1988) (August 16, 1988) (refiled)
            
            10.23
      to PNM’s Annual Report on Form 10-K for fiscal year ended December 31,
      1998
            1-6986
              PNM10.41**
            First
      Amendment to Restated and Amended Public Service Company of New Mexico
      Accelerated Management Performance Plan (1988) (August 30, 1988)
      (refiled)
            
            10.23.1
      to PNM’s Annual Report on Form 10-K for fiscal year ended December 31,
      1998
            1-6986
              PNM10.42**
            Second
      Amendment to Restated and Amended Public Service Company of New Mexico
      Accelerated Management Performance Plan (1988) (December 29, 1989)
      (refiled)
            
            10.23.2
      to PNM’s Annual Report on Form 10-K for fiscal year ended December 31,
      1998
            1-6986
              PNM10.43**
            Second  [Third]
      Amendment to the Restated and Amended Public Service Company of New Mexico
      Accelerated Management Performance Plan (1988) dated December 8,
      1992
            
            10.22.1
      to PNM's Annual Report on Form 10-K for fiscal year ended December 31,
      2004.
            1-6986
              PNM






D-11


10.44**
            Fourth
      Amendment to the Restated and Amended Public Service Company of New Mexico
      Accelerated Management Performance Plan, as amended effective December 7,
      1998
            
            10.23.4
      to PNM’s Quarterly Report on Form 10-Q for the quarter ended March 31,
      1999
            1-6986
              PNM10.45**
            Fifth
      Amendment dated November 27, 2002 to the Restated and Amended PNM
      Resources, Inc. Accelerated Performance Management Plan
            
            10.23.5
      to the Company’s Annual Report on Form 10-K for the fiscal year ended
      December 31, 2002
            333-32170
              PNMR10.46**
            Sixth
      Amendment dated December 9, 2003 to the PNM Resources, Inc. Restated and
      Amended Accelerated Performance Management Plan
            
            10.23.6
      to the Company’s Annual Report on Form 10-K for the fiscal year ended
      December 31, 2003
            333-32170
              PNMR10.47**
            Seventh
      Amendment dated November 21, 2008 to the PNM Resources, Inc. Accelerated
      Management Performance Plan
            
            10.4
      to PNMR’s Annual Report on Form 10-K for the fiscal year ended December
      31, 2008
            1-32462
              PNMR10.48**
            PNM
      Resources, Inc. Non-Union Severance Pay Plan effective August 1, 2007
      (amended and restated)
            
            10.3
      to the Company's Quarterly Report on Form 10-Q for the quarter ended
      September 30, 2007
            1-32462
              PNMR10.49**
            First
      Amendment to the PNM Resources Non-Union Severance Pay Plan executed
      November 20, 2008
            
            10.3
      to PNMR’s Annual Report on Form 10-K for the fiscal year ended December
      31, 2008
            1-32462
              PNMR10.50**
            PNM
      Service Bonus Plan dated October 23, 1984
            
            19.4
      to PNM’s Quarterly Report on Form 10-Q or the quarter ended September 30,
      1988
            1-6986
              PNM10.51**
            First
      Amendment dated November 20, 1985 to PNM Service Bonus
Plan
            
            10.11.1
      to PNM’s Annual Report on Form 10-K for the fiscal year ending December
      31, 1985
            1-6986
              PNM10.52**
            Second
      Amendment dated December 29, 1989 to PNM Service Bonus
Plan
            
            10.27.2
      to PNM’s Annual Report on Form 10-K for the fiscal year ending December
      31, 1989
            1-6986
              PNM10.53**
            Second  [Third]
      Amendment dated December 7, 1998 to PNM Service Bonus Plan
            
            10.45
      to PNM’s Quarterly Report on Form 10-Q for the quarter ended March 31,
      1999
            1-6986
              PNM10.54**
            Fourth
      Amendment dated November 27, 2002 to PNM Resources, Inc. Service Bonus
      Plan
            
            10.45.4
      to the Company’s Annual Report on Form 10-K for the fiscal year ended
      December 31, 2002
            333-32170
              PNMR10.55**
            Fifth
      Amendment dated December 9, 2003 to PNM Resources, Inc. Service Bonus
      Plan
            
            10.45.5
      to the Company’s Annual Report on Form 10-K for the fiscal year ended
      December 31, 2003
            333-32170
              PNMR10.56**
            Public
      Service Company of New Mexico OBRA ‘93 Retirement Plan
              effective
      November 15, 1993
            
            10.4
      to PNM’s Quarterly Report on Form 10-Q for the quarter ended September 30,
      1993
            1-6986
              PNM10.57**
            First
      Amendment to the Public Service Company of New Mexico OBRA ’93 Retirement
      Plan, as amended effective December 7, 1998
            
            10.48.1
      to PNM’s Quarterly Report on Form 10-Q for the quarter ended March 31,
      1999
            1-6986
              PNM






D-12


10.58**
            Second
      Amendment dated November 27, 2002 to the PNM Resources, Inc. OBRA ’93
      Retirement Plan
            
            10.48.2
      to the Company’s Annual Report on Form 10-K for the year ended December
      31, 2002
            333-32170
              PNMR10.59**
            Third
      Amendment dated December 9, 2003 to the PNM Resources, Inc. OBRA ’93
      Retirement Plan
            
            10.48.3
      to the Company’s Annual Report on Form 10-K for the year ended December
      31, 2003
            333-32170
              PNMR10.60**
            Public
      Service Company of New Mexico Section 415 Plan dated January 1,
      1994
            
            10.50
      to PNM’s Annual Report on Form 10-K for fiscal year ended December 31,
      1993
            1-6986
              PNM10.61**
            First
      Amendment dated December 7, 1998 and Second Amendment dated August 7, 1999
      to PNM Section 415 Plan and Third Amendment dated November 27, 2002 to the
      PNM Resources, Inc. Section 415 Plan
            
            10.50.1
      to the Company’s Annual Report in Form 10-K for the fiscal year ended
      December 31, 2002
            333-32170
              PNMR10.62**
            Fourth
      Amendment dated December 9, 2003 to the PNM Resources, Inc. Section 415
      Plan
            
            10.50.2
      to the Company’s Annual Report in Form 10-K for the fiscal year ended
      December 31, 2003
            333-32170
              PNMR10.63**
            PNM
      Resources, Inc. Officer Retention Plan executed September 2, 2008 (amended
      and restated effective January 1, 2009)
            
            10.1
      to the Company’s Quarterly Report in Form 10-Q for the quarter ended
      September 30, 2008
            1-32462
              PNMR10.64**
            First
      Amendment to PNM Resources, Inc. Officer Retention Plan executed November
      20, 2008
            
            10.8
      to the Company’s Annual Report in Form 10-K for the fiscal year ended
      December 31, 2008
            1-32462
              PNMR10.65*
            PNM
      Resources Executive Spending Account Plan dated December 9,
      2003
            
            10.52
      to the Company’s Annual Report on Form 10-K for fiscal year ended December
      31, 2003
            333-32170
              PNMR10.66**
            First
      Amendment to PNM Resources Executive Spending Account Plan effective
      January 1, 2004
            
            10.52.1
      to PNM’s Quarterly Report on Form 10-Q for the quarter ended March 31,
      2004
            333-32170
              PNMR10.67**
            Second
      Amendment to PNMR’s Executive Spending Account Plan executed August 28,
      2008
            
            10.2
      to PNMR’s Quarterly Report on Form 10-Q for the quarter ended September
      30, 200810.68**
            Third
      Amendment to PNMR’s Executive Spending Account Plan effective January 1,
      2009
            
            10.7
      to PNMR’s Annual Report on Form 10-K for the year ended December 31,
      2008
            1-32462
              PNMR10.69**
            Third
      Restated and Amended Public Service Company of New Mexico Performance
      Stock Plan effective March 10, 1998
            
            10.74
      to PNM's Quarterly Report on Form 10-Q for the quarter ended March 31,
      1998
            1-6986
              PNM10.70**
            First
      Amendment to the Third Restated and Amended Public Service Company of New
      Mexico Performance Stock Plan Dated February 7, 2000
            
            10.74.1
      to PNM's Quarterly Report on Form 10-Q for the quarter ended March 31,
      2000
            1-6986
              PNM


D-13





10.71**
            Second
      Amendment to the Third Restated and Amended Public Service Company of New
      Mexico Performance Stock Plan, effective December 7, 1998
            
            10.74.2
      to PNM's Annual Report on Form 10-K for the fiscal year ended December 31,
      2000
            1-6986
              PNM10.72**
            Third
      Amendment to the Third Restated and Amended Public Service Company of New
      Mexico Performance Stock Plan, effective December 10, 2000
            
            10.74.3
      to PNM’s Annual Report on Form 10-K for the fiscal year ended December 31,
      2000
            1-6986
              PNM10.73**
            Fourth
      Amendment to Third Restated and Amended Public Service Company of New
      Mexico Performance Stock Plan dated December 31, 2001
            
            4.3.5
      to PNM Resources’ Post-Effective Amendment No. 1 to Form S-8 Registration
      Statement filed December 31, 2001
            333-03303
              PNMR10.74**
            Fifth
      Amendment to the Third Restated and Amended PNM Resources, Inc.
      Performance Stock Plan dated September 6, 2002
            
            10.74.5
      to the Company’s Quarterly Report on Form 10-Q for the quarter ended
      September 30, 2002
            333-32170
              PNMR10.75**
            PNM
      Resources, Inc.
              Director
      Retainer Plan,
              dated
      December 31, 2001
            
            4.3
      to PNM Resources, Inc.
              Post-Effective
      Amendment No. 1 to Form S-8 Registration Statement filed December 31,
      2001
            333-03289
              PNMR10.76**
            First
      Amendment dated
              February
      17, 2003 to
              PNM
      Resources, Inc. Director Retainer Plan
            
            10.40.1
      to the Company’s Quarterly Report on Form 10-Q for the quarter ended March
      31, 2003
            333-32170
              PNMR10.77**
            Supplemental
      Employee Retirement Agreement for Patrick T. Ortiz (amended and restated
      effective January 1, 2009)
            
            10.3
      to the Company’s Quarterly Report on Form 10-Q for the quarter ended
      September 30, 2008
            1-32462
              PNMR10.78**
            Supplemental
      Employee Retirement Agreement for Jeffry E. Sterba (amended and restated
      effective January 1, 2009)
            
            10.9
      to the Company’s Annual Report on Form 10-K for the fiscal year ended
      December 31, 2008
            1-32462
              PNMR10.79**
            Amended
      and Restated Retention Bonus Agreement for Jeffry E. Sterba executed
      September 7, 2007
            
            10.4
      to the Company’s Quarterly Report on Form 10-Q for the quarter ended
      September 30, 2007
            1-32462
              PNMR10.80**
            First
      Amendment to the Retention Bonus Agreement between PNMR and Jeffrey E.
      Sterba effective January 1, 2009
            
            10.11
      to the Company’s Annual Report on Form 10-K for the fiscal year ended
      December 31, 2008
            1-32462
              PNMR10.81**
            PNM
      Resources Officer Life Insurance Plan dated April 28, 2004
            
            10.24.1
      to the Company’s Quarterly Report on Form 10-Q for the quarter ended March
      31, 2004
            333-32170
              PNMR10.82**
            First
      Amendment to PNM Resources Officer Life Insurance Plan dated December 16,
      2004
            
            10.27
      to the Company’s Annual Report on Form 10-K for the fiscal year ended
      December 31, 2004.
            333-32170
              PNMR


D-14





10.83**
            Second
      Amendment to PNM Resources Officer Life Insurance Plan executed April 15,
      2007
            
            10.5
      to the Company’s Quarterly Report on Form 10-Q for the quarter ended
      September 30, 2007
            1-32462
              PNMR10.84**
            Third
      Amendment to the PNMR Officer Life Insurance Plan effective January 1,
      2009
            
            10.10
      to PNMR’s Annual Report on Form 10-K for the fiscal year ended December
      31, 2008
            1-32462
              PNMR10.84.1**
            Fourth
      Amendment to the PNMR Officer Life Insurance Plan effective January 1,
      2009
            
            10.15
      to PNMR’s Annual Report on Form 10-K for the fiscal year ended December
      31, 2008
            1-32462
              PNMR10.85**
            Long
      Term Care Insurance Plan effective January 1, 2003
            
            10.87
      to the Company’s Annual Report on Form 10-K for the year ended December
      31, 2002
            333-32170
              PNMR10.86**
            Executive
      Long Term Disability effective January 1, 2003
            
            10.88
      to the Company’s Annual Report on Form 10-K for the year ended December
      31, 2002
            333-32170
              PNMR10.87
            Agreement
      dated August 16, 2007 between PNM Resources and Public Policy Strategy
      Group LLC for consulting services performed by William J. Real (Terminated
      January 16, 2008)
            
            10.6
      to the Company’s Quarterly Report on Form 10-Q for the quarter ended
      September 30, 2007
            1-32462
              PNMR10.88
            Supplemental
      Indenture of Lease dated as of July 19, 1966 between PNM and other
      participants in the Four Corners Project and the Navajo Indian Tribal
      Council
            
            4-D
      to PNM’s Registration Statement No. 2-26116
            2-26116
              PNM10.89
            Amendment
      and Supplement No. 1 to Supplemental and Additional Indenture of Lease
      dated April 25, 1985 between the Navajo Tribe of Indians and Arizona
      Public Service Company, El Paso Electric Company, Public Service Company
      of New Mexico, Salt River Project Agricultural Improvement and Power
      District, Southern California Edison Company, and Tucson Electric Power
      Company (refiled)
            
            10.1.1
      to PNM’s Annual Report on Form 10-K for fiscal year ended December 31,
      1995
            1-6986
              PNM10.90
            Water
      Supply Agreement between the Jicarilla Apache Tribe and Public Service
      Company of New Mexico, dated July 20, 2000
            
            10.5
      to PNM’s Quarterly Report of Form 10-Q for the quarter ended September 30,
      2001
            1-6986
              PNM10.91
            Arizona
      Nuclear Power Project Participation Agreement among PNM and Arizona Public
      Service Company, Salt River Project Agricultural Improvement and Power
      District, Tucson Gas & Electric Company and El Paso Electric Company,
      dated August 23, 1973
            
            5-T
      to PNM’s Registration Statement No. 2-50338
            2-50338
              PNM






D-15


10.92
            Amendments
      No. 1 through No. 6 to Arizona Nuclear Power Project Participation
      Agreement
            
            10.8.1
      to PNM’s Annual Report on Form 10-K for fiscal year ended December 31,
      1991
            1-6986
              PNM10.93
            Amendment
      No. 7 effective April 1, 1982, to the Arizona Nuclear Power Project
      Participation Agreement (refiled)
            
            10.8.2
      to PNM’s Annual Report on Form 10-K for fiscal year ended December 31,
      1991
            1-6986
              PNM10.94
            Amendment
      No. 8 effective September 12, 1983, to the Arizona Nuclear Power Project
      Participation Agreement (refiled)
            
            10.58
      to PNM’s Annual Report on Form 10-K for fiscal year ended December 31,
      1993
            1-6986
              PNM10.95
            Amendment
      No. 9 to Arizona Nuclear Power Project Participation Agreement dated as of
      June 12, 1984 (refiled)
            
            10.8.4
      to PNM’s Annual Report of the Registrant on Form 10-K for fiscal year
      ended December 31, 1994
            1-6986
              PNM10.96
            Amendment
      No. 10 dated as of November 21, 1985 and Amendment No. 11 dated as of June
      13, 1986 and effective January 10, 1987 to Arizona Nuclear Power Project
      Participation Agreement (refiled)
            
            10.8.5
      to PNM’s Annual Report of the Registrant on Form 10-K for fiscal year
      ended December 31, 1994
            1-6986
              PNM10.97
            Amendment
      No. 12 to Arizona Nuclear Power Project Participation Agreement dated June
      14, 1988, and effective August 5, 1988
            
            19.1
      to PNM's Quarterly Report on Form 10-Q for the quarter ended September 30,
      1990
            1-6986
              PNM10.98
            Amendment
      No. 13 to the Arizona Nuclear Power Project Participation Agreement dated
      April 4, 1990, and effective June 15, 1991
            
            10.8.10
      to PNM’s Annual Report on Form 10-K for the fiscal year ended December 31,
      1990
            1-6986
              PNM10.99
            Amendment
      No. 14 to the Arizona Nuclear Power Project Participation Agreement
      effective June 20, 2000
            
            10.8.9
      to PNM’s Annual Report on Form 10-K for the fiscal year ended December 31,
      2000
            1-6986
              PNM10.100
            Underground
      Coal Sales Agreement, dated August 31, 2001 among San Juan Coal Company,
      PNM and Tucson Electric Power Company
            
            10.85
      to PNM’s Quarterly Report on Form 10-Q for the quarter ending September
      31, 2001  (Confidential treatment was requested for portions of
      this exhibit, and such portions were omitted from this exhibit filed and
      were filed separately with the Securities and Exchange
      Commission)
            1-6986
              PNM10.101
            Amendment
      One to Underground Coal Sales Agreement dated December 15, 2003 among San
      Juan Coal Company, PNM and Tucson Electric Coal Company
            
            10.9.1
      to PNM’s Amended Report on Form 10-K for fiscal year ended December 31,
      2003 (Confidential treatment was requested for portions of this exhibit,
      and such portions were omitted from this exhibit filed and were filed
      separately with the Securities and Exchange Commission)
            1-6986
              PNM


D-16





10.102
            Amendment
      Two to Underground Coal Sales Agreement effective September 15, 2004 among
      San Juan Coal Company, PNM and Tucson Electric Coal
Company
            
            10.9.2
      to PNM’s Quarterly Report on Form 10-Q for the quarter ended September 30,
      2004
            1-6986
              PNM10.103
            Amendment
      Three to Underground Coal Sales Agreement executed April 29, 2005 among
      San Juan Coal Company, PNM and Tucson Electric Coal Company (Confidential
      treatment was requested for portions of this exhibit, and such portions
      were omitted from this exhibit filed and were filed separately with the
      Securities and Exchange Commission)
            
            10.86.1
      to the Company’s Quarterly Report on Form 10-Q for the quarter ended June
      30, 2005
            1-6986
              PNM10.104
            Amendment
      Four to Underground Coal Sales Agreement effective March 7, 2007 among San
      Juan Coal Company, PNM and Tucson Electric Coal Company
            
            10.89
      to PNM’s Quarterly Report on Form 10-Q for the quarter ended March 31,
      2007
            1-6986
              PNM10.105
            Amendment
      Five to Underground Coal Sales Agreement executed December 21, 2007 among
      San Juan Coal Company, PNM and Tucson Electric Power Company (Confidential
      treatment was requested for portions of this exhibit, and such portions
      were omitted from this exhibit filed and were filed separately with the
      Securities and Exchange Commission)
            
            10.95
      to PNM’s Annual Report on Form 10-K for the year ended December 31,
      2007
            1-6986
              PNM10.106
            San
      Juan Unit 4 Early Purchase and Participation Agreement dated as of
      September 26, 1983 between PNM and M-S-R Public Power Agency, and
      Modification No. 2 to the San Juan Project Agreements dated December 31,
      1983 (refilled)
            
            10.11
      to PNM’s Quarterly Report on Form 10-Q for the quarter ended March 31,
      1994
            1-6986
              PNM10.107
            Amendment
      No. 1 to the Early Purchase and Participation Agreement between Public
      Service Company of New Mexico and M-S-R Public Power Agency, executed as
      of December 16, 1987, for San Juan Unit 4 (refiled)
            
            10.11.1
      to PNM’s Annual Report on Form 10-K for fiscal year ended December 31,
      1997
            1-6986
              PNM10.108
            Amendment
      No. 3 to the San Juan Unit 4 Early Purchase and Participation Agreement
      between Public Service Company of New Mexico and M-S-R Public Power
      Agency, dated as of October 27, 1999
            
            10.11.3
      to PNM’s Annual Report on Form 10-K for fiscal year ended December 31,
      1999
            1-6986
              PNM


D-17





10.109
            Amended
      and Restated San Juan Unit 4 Purchase and Participation Agreement dated as
      of December 28, 1984 between PNM and the Incorporated County of Los Alamos
      (refiled)
            
            10.12
      to PNM’s Annual Report on Form 10-K for fiscal year ended December 31,
      1994
            1-6986
              PNM10.110
            Amendment
      No. 1 to the Amended and Restated San Juan Unit 4 Purchase and
      Participation Agreement between Public Service Company of New Mexico and
      M-S-R Public Power Agency, dated as of October 27, 1999
            
            10.12.1
      to PNM’s Annual Report Form 10-K for fiscal year ended December 31,
      1999
            1-6986
              PNM10.111
            Amendment
      No. 2 to the San Juan Unit 4 Purchase Agreement and Participation
      Agreement between Public Service Company of New Mexico and The
      Incorporated County of Los Alamos, New Mexico, dated October 27,
      1999
            
            10.13
      to PNM’s Annual Report on Form 10-K for fiscal year ended December 31,
      1999
            1-6986
              PNM10.112
            Participation
      Agreement among PNM, Tucson Electric Power Company and certain financial
      institutions relating to the San Juan Coal Trust dated as of December 31,
      1981 (refiled)
            
            10.14
      to PNM’s Annual Report on Form 10-K for fiscal year ended December 31,
      1992
            1-6986
              PNM10.113
            San
      Juan Unit 4 Purchase and Participation Agreement Public Service Company of
      New Mexico and the City of Anaheim, California dated April 26,
      1991
            
            19.2
      to PNM’s Quarterly Report on Form 10-Q for the quarter ended March 31,
      1991
            1-6986
              PNM10.114
            Amendment
      No. 1 to the San Juan Unit 4 Purchase and Participation Agreement between
      Public Service Company of New Mexico and The City of Anaheim, California,
      dated October 27, 1999
            
            10.36.1
      to Annual Report PNM’s on Form 10-K for fiscal year ended December 31,
      1999
            1-6986
              PNM10.115
            Restated
      and Amended San Juan Unit 4 Purchase and Participation Agreement between
      Public Service Company of New Mexico and Utah Associated Municipal Power
      Systems
            
            10.2.1
      to PNM’s Quarterly Report on Form 10-Q for the quarter ended September 30,
      1993
            1-6986
              PNM10.116
            Amendment
      No. 1 to the Restated and Amended San Juan Unit 4 Purchase And
      Participation Agreement between Public Service Company of New Mexico And
      Utah Associated Municipal Power Systems, dated October 27,
      1999
            
            10.38.1
      to PNM’s Annual Report on Form 10-K for fiscal year ended December 31,
      1999
            1-6986
              PNM10.117
            Participation
      Agreement dated as of June 30, 1983 among Security Trust Company, as
      Trustee, PNM, Tucson Electric Power Company and certain financial
      institutions relating to the San Juan Coal Trust (refiled)
            
            10.61
      to PNM’s Annual Report on Form 10-K for fiscal year ended December 31,
      1993
            1-6986
              PNM


D-18





10.118
            Amended
      and Restated San Juan Project Participation Agreement dated as of March 3,
      2006, among Public Service Company of New Mexico, Tucson Electric Power
      Company, The City of Farmington, New Mexico, M-S-R Public Power Agency,
      The Incorporated County of Los Alamos, New Mexico, Southern California
      Public Power Authority, City of Anaheim, Utah Associated Municipal Power
      System and Tri-State Generation and Transmission Association,
      Inc.
            
            10.119
      to PNM's Quarterly Report on Form 10-Q for the quarter ended March 30,
      2006
            1-6986
              PNM10.119
            Interconnection
      Agreement dated November 23, 1982, between PNM and Southwestern Public
      Service Company (refiled)
            
            10.16
      to PNM’s Annual Report on Form 10-K for fiscal year ended December 31,
      1992
            1-6986
              PNM10.120*
            Facility
      Lease dated as of December 16, 1985 between The First National Bank of
      Boston, as Owner Trustee, and Public Service Company of New Mexico
      together with Amendments No. 1, 2 and 3 thereto (refiled)
            
            10.18
      to PNM’s Annual Report on Form 10-K for fiscal year ended December 31,
      1995
            1-6986
              PNM10.121*
            Amendment
      No. 4 dated as of March 8, 1995, to Facility Lease between Public Service
      Company of New Mexico and the First National Bank of Boston, dated as of
      December 16, 1985
            
            10.18.5
      to the PNM's Quarter Report on Form10-Q for the quarter ended March 31,
      1995
            1-6986
              PNM10.122
            Facility
      Lease dated as of July 31, 1986, between the First National Bank of
      Boston, as Owner Trustee, and Public Service Company of New Mexico
      together with Amendments No. 1, 2 and 3 thereto (refiled)
            
            10.19
      to PNM’s Annual Report on Form 10-K for fiscal year ended December 31,
      1996
            1-6986
              PNM10.123
            Facility
      Lease dated as of August 12, 1986, between The First National Bank of
      Boston, as Owner Trustee, and Public Service Company of New Mexico
      together with Amendments No. 1 and 2 thereto (refiled)
            
            10.20
      to PNM’s Annual Report on Form 10-K for fiscal year ended December 31,
      1996
            1-6986
              PNM10.124
            Amendment
      No. 2 dated as of April 10, 1987 to Facility Lease dated as of August 12,
      1986, as amended, between The First National Bank of Boston, not in its
      individual capacity, but solely as Owner Trustee under a Trust Agreement,
      dated as of August 12, 1986, with MFS Leasing Corp., Lessor and Public
      Service Company of New Mexico, Lessee (refiled)
            
            10.20.2
      to PNM’s Annual Report on Form 10-K for fiscal year ended December 31,
      1998
            1-6986
              PNM


D-19





10.125
            Amendment
      No. 3 dated as of March 8, 1995, to Facility Lease between Public Service
      Company of New Mexico and the First National Bank of Boston, dated as of
      August 12, 1986
            
            10.20.4
      to PNM’s Quarterly Report on Form 10-Q for the quarter ended March 31,
      1995
            1-6986
              PNM10.126
            Facility
      Lease dated as of December 15, 1986, between The First National Bank of
      Boston, as Owner Trustee, and Public Service Company of New Mexico (Unit 1
      Transaction) together with Amendment No. 1 thereto
    (refiled)
            
            10.21
      to PNM’s Annual Report on Form 10-K for fiscal year ended December 31,
      1996
            1-6986
              PNM10.127
            Facility
      Lease dated as of December 15, 1986, between The First National Bank of
      Boston, as Owner Trustee, and Public Service Company of New Mexico Unit 2
      Transaction) together with Amendment No. 1 thereto
    (refiled)
            
            10.22
      to PNM’s Annual Report of the Registrant on Form 10-K for fiscal year
      ended December 31, 1996
            1-6986
              PNM10.128
            Amendment
      No. 2 dated as of April 10, 1987 to the Facility Lease dated as of August
      12, 1986 between The First National bank of Boston, as Owner Trustee, and
      PNM. (Unit 2 transaction.) (This is an amendment to a Facility Lease which
      is substantially similar to the Facility Lease filed as Exhibit 28.1 to
      the Company’s Current Report on Form 8-K dated August 18,
      1986)
            
            10.53
      to PNM’s Annual Report on Form 10-K for fiscal year ended December 31,
      1987
            1-6986
              PNM


10.129
            Master
      Decommissioning Trust Agreement for Palo Verde Nuclear Generating Station
      dated March 15, 1996, between Public Service Company of New Mexico and
      Mellon Bank, N.A.
            
            10.68
      to PNM's Quarterly Report on Form 10-Q for the quarter ended March 31,
      1996
            1-6986
              PNM10.130
            Amendment
      Number One to the Master Decommissioning Trust Agreement for Palo Verde
      Nuclear Generating Station dated January 27, 1997, between Public Service
      Company of New Mexico and Mellon Bank, N.A.
            
            10.68.1
      to PNM's Annual Report on Form 10-K for fiscal year ended December 31,
      1997
            1-6986
              PNM10.131
            Amendment
      Number Two to the Master Decommissioning Trust Agreement for Palo Verde
      Nuclear Generating Station between Public Service Company of New Mexico
      and Mellon Bank, N.A.
            
            10.68.2
      to PNM's Annual Report on Form 10-K for fiscal year ended December 31,
      2003
            1-6986
              PNM10.132
            Refunding
      Agreement No. 8A, dated as of December 23, 1997, among PNM, the Owner
      Participant Named Therein, State Street Bank and Trust Company, as Owner
      Trustee, The Chase Manhattan Bank, as Indenture Trustee, and First PV
      Funding Corporation
            
            10.73
      to PNM's Quarterly Report on Form 10-Q for the quarter ended March 31,
      1998
            1-6986
              PNM


D-20





10.133
            PVNGS
      Capital Trust—Variable Rate Trust Notes—PVNGS Note Agreement dated as of
      July 31, 1998
            
            10.76
      to PNM's Quarterly Report on Form 10-Q for the quarter ended September 30,
      1998
            1-6986
              PNM10.134
            January
      12, 1994 Stipulation
            
            10.53
      to PNM’s Annual Report on form 10-K for fiscal year ended December 31,
      1993
            1-6986
              PNM10.135
            New
      Mexico Public Service Commission Order dated July 30, 1987, and Exhibit I
      thereto, in NMPUC Case No. 2004, regarding the PVNGS decommissioning trust
      fund (refiled)
            
            10.67
      to PNM’s Annual Report on Form 10-K for fiscal year ended December 31,
      1997
            1-6986
              PNM10.136
            Stipulation
      in the matter of the Commission’s investigation of the rates for electric
      service of Public Service Company of New Mexico, Rate Case No. 2761, dated
      May 21, 1999
            
            10.78
      to PNM's Quarterly Report on Form 10-Q for the quarter ended September 30,
      1999
            1-6986
              PNM10.137
            Stipulation
      in the matter of the Commission’s investigation of the rates for electric
      service of Public Service Company of New Mexico, Rate Case No. 2761, dated
      May 27, 1999
            
            10.78.1
      to PNM's Quarterly Report on Form 10-Q for the quarter ended September 30,
      1999
            1-6986
              PNM10.138
            Stipulation
      in the matter of PNM’s transition plan Utility Case No. 3137, dated
      October 10, 2002 as amended by Amendment to Stipulated Agreement dated
      October 18, 2002
            
            10.86
      to the Company’s Annual Report on Form 10-K for the year ended December
      31, 2002
            1-6986
              PNM10.139
            Settlement
      Agreement between Public Service Company of New Mexico and Creditors of
      Meadows Resources, Inc. dated November 2, 1989 (refiled)
            
            10.34
      to PNM’s Quarterly Report on Form 10-Q for quarter ended June 30,
      2000
            1-6986
              PNM10.140
            First
      Amendment dated April 24, 1992 to the Settlement Agreement dated November
      2, 1989 among Public Service Company of New Mexico, the lender parties
      thereto and collateral agent (refiled)
            
            10.34.1
      to PNM’s Quarterly Report on Form 10-Q for quarter ended June 30,
      2000
            1-6986
              PNM10.141
            Amendment
      dated April 11, 1991 among Public Service Company of New Mexico, certain
      banks and Chemical Bank and Citibank, N.A., as agents for the
      banks
            
            19.1
      to PNM’s Quarterly Report on Form 10-Q for the quarter ended September 30,
      1991
            1-6986
              PNM10.142
            Agreement
      of PNM pursuant to Item 601(b)(4)(iii) of Regulation S-K
      (refiled)
            
            10.62
      to PNM’s Annual Report on Form 10-K for fiscal year ended December 31,
      1993
            1-6986
              PNM10.143
            Stipulation
      dated February 28, 2005 in NMPRC Case No. 04-00315-UT regarding the
      application of PNM Resources and TNMP for approval of the TNP
      acquisition
            
            10.134
      to the Company’s Quarterly Report on Form 10-Q for the quarter ended March
      31, 2005
            1-32462
              PNMR/
              TNMP






D-21


10.144
            Settlement
      Agreement dated February 3, 2005, between PNM Resources, Inc. and
      Texas-New Mexico Power Company, the cities of Dickenson, Lewisville, La
      Marque, Ft. Stockton and Friendswood, Texas, the Legal and Enforcement
      Division of the Public Utility Commission of Texas, the Office of Public
      Utility Counsel, the Texas Industrial Energy Consumers and the Alliance
      for Retail Markets
            
            10.1-10.1.7
      to the Company’s Current Report on Form 8-K filed February 7,
      2005
            1-32462
              PNMR/
              TNMP10.145
            Consent
      Decree entered into by PNM on March 9, 2005 relating to the citizen suit
      under the Clean Air Act and the excess emissions report matter for
      SJGS
            
            10.135
      to the Company’s Quarterly Report on Form 10-Q for the quarter ended March
      31, 2005
            1-6986
              PNM10.146
            Stipulation
      in the matter of PNM’s application for approval of a certificate of public
      convenience and necessity for the Afton Generating Station, Case No.
      05-00275-UT, dated November 30, 2005
            
            10.132
      to the Company’s Annual report on Form 10-K for the year ended December
      31, 2005
            1-6986
              PNM10.147
            Contract
      dated April 29, 1987 between TNMP and El Paso Electric
    Company
            
            10(f),
      Form 8 applicable to TNMP’s Annual Report on Form 10-K for the year ended
      December 31, 1986
            2-97230
              TNMP10.148
            Interconnection
      Agreement between TNMP and Plains Electric Generation and Transmission
      Cooperative, Inc. dated July 19, 1984
            
            10(j),
      Form 8 applicable to TNMP’s Annual Report on Form 10-K for the year ended
      December 31, 1986
            2-97230
              TNMP10.149
            Interchange
      Agreement between TNMP and El Paso Electric Company dated April 29,
      1987
            
            10(l),
      Form 8 applicable to TNMP’s Annual Report on Form 10-K for the year ended
      December 31, 1986
            2-97230
              TNMP10.150
            Amendment
      No.1, dated November 21, 1994, to Interchange Agreement between TNMP and
      El Paso Electric Company
            
            10(nn)1
      to TNMP’s Annual Report on Form 10-K for the year ended December 31,
      1994
            2-97230
              TNMP10.151
            DC
      Terminal Participation Agreement between TNMP and El Paso Electric Company
      dated December 8, 1981 as amended
            
            10(m),
      Form 8 applicable to TNMP’s Annual Report on Form 10-K for the year ended
      December 31, 1986
            2-97230
              TNMP10.152
            Wholesale
      Requirements Power Sale and Services Agreement between PNM and TNMP dated
      June 29, 2001
            
            10(i)
      to TNMP’s Form S-4/A filed November 4, 2003
            333-108522
              TNMP


D-22





10.153
            Power
      Supply Service Agreement dated December 22, 2003 between First Choice
      Power Special Purpose, L.P. (as assignee of First Choice Power, L.P.,
      f/k/a First Choice Power, Inc.) and Constellation Power Source, Inc.
      (Confidential treatment was requested for portions of this exhibit, and
      such portions were omitted from this exhibit filed and were filed
      separately with the Securities and Exchange Commission)
            
            10.1
      to TNP’s Quarterly Report on Form 10-Q for the quarter ended June 30,
      2004
            2-8980010.154
            Amendment
      No. 1 to Power and Services Agreement dated June 1, 2004 between First
      Choice Power Special Purpose, L.P. and Constellation Power Services, Inc.
      (Confidential treatment was requested for portions of this exhibit, and
      such portions were omitted from this exhibit filed and were filed
      separately with the Securities and Exchange Commission)
            
            10.2
      to TNP’s Quarterly Report on Form 10-Q for the quarter ended June 30,
      2004
            2-8980010.155
            Amendment
      No.2 to Power and Services Agreement dated August 25th,
      2004, between First Choice Power Special Purpose and Constellation Energy
      Commodities Group (Confidential treatment was requested for portions of
      this exhibit, and such portions were omitted from this exhibit filed and
      were filed separately with the Securities and Exchange
      Commission)
            
            10.1
      to TNP’s Quarterly Report on Form 10-Q for the quarter ended March 31,
      2005
            2-8980010.156
            Amendment
      No.3 to Power and Services Agreement dated March 7th,
      2005, between First Choice Power Special Purpose and Constellation Energy
      Commodities Group (Confidential treatment was requested for portions of
      this exhibit, and such portions were omitted from this exhibit filed and
      were filed separately with the Securities and Exchange
      Commission)
            
            10.2
      to TNP’s Quarterly Report on Form 10-Q for the quarter ended March 31,
      2005
            2-8980021
            Certain
      subsidiaries of PNM Resources
            
            21
      to the Company’s Annual Report on Form 10-K for the year ended December
      31, 2008
            1-32462
              PNMR


D-23





99.2*
            Participation
      Agreement dated as of December 16, 1985, among the Owner Participant named
      therein, First PV Funding Corporation. The First National Bank of Boston,
      in its individual capacity and as Owner Trustee (under a Trust Agreement
      dated as of December 16, 1985 with the Owner Participant), Chemical Bank,
      in its individual capacity and as Indenture Trustee (under a Trust
      Indenture, Mortgage, Security Agreement and Assignment of Rents dated as
      of December 16, 1985 with the Owner Trustee), and Public Service Company
      of New Mexico, including Appendix A definitions together with Amendment
      No. 1 dated July 15, 1986 and Amendment No. 2 dated November 18, 1986
      (refiled)
            
            99.2
      to PNM’s Annual Report on Form 10-K for fiscal year ended December 31,
      1995
            1-6986
              PNM99.3
            Trust
      Indenture, Mortgage, Security Agreement and Assignment of Rents dated as
      of December 16, 1985, between the First National Bank of Boston, as Owner
      Trustee, and Chemical Bank, as Indenture Trustee together with
      Supplemental Indentures Nos. 1 and 2 (refiled)
            
            99.3
      to PNM’s Quarterly Report on Form 10-Q for the quarter ended March 31,
      1996
            1-6986
              PNM99.3.3
            Supplemental
      Indenture No. 3 dated as of March 8, 1995, to Trust Indenture Mortgage,
      Security Agreement and Assignment of Rents between The First National Bank
      of Boston and Chemical Bank dated as of December 16, 1985
            
            99.3.3
      to PNM’s Quarterly Report on Form 10-Q for the quarter ended March 31,
      1995
            1-6986
              PNM99.4*
            Assignment,
      Assumption and Further Agreement dated as of December 16, 1985, between
      Public Service Company of New Mexico and The First National Bank of
      Boston, as Owner Trustee (refiled)
            
            99.4
      to PNM’s Annual Report on Form 10-K for fiscal year ended December 31,
      1995
            1-6986
              PNM


D-24





99.5
            Participation
      Agreement dated as of July 31, 1986, among the Owner Participant named
      herein, First PV Funding Corporation, The First National Bank of Boston,
      in its individual capacity and as Owner Trustee (under a Trust Agreement
      dated as of July 31, 1986, with the Owner Participant), Chemical Bank, in
      its individual capacity and as Indenture Trustee (under a Trust Indenture,
      Mortgage, Security Agreement and Assignment of Rents dated as of July 31,
      1986, with the Owner Trustee), and Public Service Company of New Mexico,
      including Appendix A definitions together with Amendment No. 1 thereto
      (refiled)
            
            99.5
      to PNM’s Annual Report on Form 10-K for fiscal year ended December 31,
      1996
            1-6986
              PNM99.6
            Trust
      Indenture, Mortgage, Security Agreement and Assignment of Rents dated as
      of July 31, 1986, between The First National Bank of Boston, as Owner
      Trustee, and Chemical Bank, as Indenture Trustee together with
      Supplemental Indenture No. 1 thereto (refiled)
            
            99.6
      to PNM’s Annual Report on Form 10-K for fiscal year ended December 31,
      1996
            1-6986
              PNM99.7
            Assignment,
      Assumption, and Further Agreement dated as of July 31, 1986, between
      Public Service Company of New Mexico and The First National Bank of
      Boston, as Owner Trustee (refiled)
            
            99.7
      to PNM’s Annual Report on Form 10-K for fiscal year ended December 31,
      1996
            1-6986
              PNM99.8
            Participation
      Agreement dated as of August 12, 1986, among the Owner Participant named
      therein, First PV Funding Corporation. The First National Bank of Boston,
      in its individual capacity and as Owner Trustee (under a Trust Agreement
      dated as of August 12, 1986, with the Owner Participant), Chemical Bank,
      in its individual capacity and as Indenture Trustee (under a Trust
      Indenture, Mortgage, Security Agreement and Assignment of Rents dated as
      of August 12, 1986, with the Owner Trustee), and Public Service Company of
      New Mexico, including Appendix A definitions (refiled)
            
            99.8
      to PNM’s Quarterly Report on Form 10-Q for the quarter ended March 31,
      1997
            1-6986
              PNM99.8.1*
            Amendment
      No. 1 dated as of November 18, 1986, to Participation Agreement dated as
      of August 12, 1986 (refiled)
            
            99.8.1
      to PNM’s Quarterly Report on Form 10-Q for the quarter ended March 31,
      1997
            1-6986
              PNM


D-25





99.9*
            Trust
      Indenture, Mortgage, Security Agreement and Assignment of Rents dated as
      of August 12, 1986, between the First National Bank of Boston, as Owner
      Trustee, and Chemical Bank, as Indenture Trustee together with
      Supplemental Indenture No. 1 thereto (refiled)
            
            99.9
      to PNM’s Annual Report of the Registrant on Form 10-K for fiscal year
      ended December 31, 1996
            1-6986
              PNM99.9.2
            Supplemental
      Indenture No. 2 dated as of March 8, 1995, to Trust Indenture, Mortgage,
      Security Agreement and Assignment of Rents between The First National Bank
      of Boston and Chemical Bank dated as of August 12, 1986
            
            99.9.1
      to PNM’s Quarterly Report on Form 10-Q for the quarter ended March 31,
      1995
            1-6986
              PNM99.10*
            Assignment,
      Assumption, and Further Agreement dated as of August 12, 1986,
      between Public Service Company of New Mexico and The First National Bank
      of Boston, as Owner Trustee (refiled)
            
            99.10
      to PNM’s Quarterly Report on Form 10-Q for the quarter ended March 31,
      1997
            1-6986
              PNM99.11*
            Participation
      Agreement dated as of December 15, 1986, among the Owner Participant named
      therein, First PV Funding Corporation, The First National Bank of Boston,
      in its individual capacity and as Owner Trustee (under a Trust Agreement
      dated as of December 15, 1986, with the Owner Participant), Chemical Bank,
      in its individual capacity and as Indenture Trustee (under a Trust
      Indenture, Mortgage, Security Agreement and Assignment of Rents dated as
      of December 15, 1986, with the Owner Trustee), and Public Service Company
      of New Mexico, including Appendix A definitions (Unit 1 Transaction)
      (refiled)
            
            99.1
      to PNM’s Quarterly Report on Form 10-Q for the quarter ended March 31,
      1997
            1-6986
              PNM99.12
            Trust
      Indenture, Mortgage, Security Agreement and Assignment of Rents dated as
      of December 15, 1986, between The First National Bank of Boston, as Owner
      Trustee, and Chemical Bank, as Indenture Trustee (Unit 1 Transaction)
      (refiled)
            
            99.12
      to PNM’s Quarterly Report on Form 10-Q for the quarter ended March 31,
      1997
            1-6986
              PNM99.13
            Assignment,
      Assumption and Further Agreement dated as of December 15, 1986, between
      Public Service Company of New Mexico and The First National Bank of
      Boston, as Owner Trustee (Unit 1 Transaction) (refiled)
            
            99.13
      to PNM’s Quarterly Report on Form 10-Q for the quarter ended March 31,
      1997
            1-6986
              PNM


D-26





99.14
            Participation
      Agreement dated as of December 15, 1986, among the Owner Participant named
      therein, First PV Funding Corporation, The First National Bank of Boston,
      in its individual capacity and as Owner Trustee (under a Trust Agreement
      dated as of December 15, 1986, with the Owner Participant), Chemical Bank,
      in its individual capacity and as Indenture Trustee (under a Trust
      Indenture, Mortgage, Security Agreement and Assignment of Rents dated as
      of December 15, 1986, with the Owner Trustee), and Public Service Company
      of New Mexico, including Appendix A definitions (Unit 2 Transaction)
      (refiled)
            
            99.14
      to PNM’s Quarterly Report on Form 10-Q for the quarter ended March 31,
      1997
            1-6986
              PNM99.15
            Trust
      Indenture, Mortgage, Security Agreement and Assignment of Rents dated as
      of December 31, 1986, between the First National Bank of Boston, as Owner
      Trustee, and Chemical Bank, as Indenture Trustee (Unit 2 Transaction)
      (refiled)
            
            99.15
      to PNM’s Annual Report on Form 10-K for fiscal year ended December 31,
      1996
            1-6986
              PNM99.16
            Assignment,
      Assumption, and Further Agreement dated as of December 15, 1986, between
      Public Service Company of New Mexico and The First National Bank of
      Boston, as Owner Trustee (Unit 2 Transaction) (refiled)
            
            99.16
      to PNM’s Quarterly Report on Form 10-Q for the quarter ended March 31,
      1997
            1-6986
              PNM99.17*
            Waiver
      letter with respect to “Deemed Loss Event” dated as of August 18, 1986,
      between the Owner Participant named therein, and Public Service Company of
      New Mexico (refiled)
            
            99.17
      to PNM’s Annual Report on Form 10-K for fiscal year ended December 31,
      1996
            1-6986
              PNM99.18*
            Waiver
      letter with respect to Deemed Loss Event” dated as of August 18, 1986,
      between the Owner Participant named therein, and Public Service Company of
      New Mexico (refiled)
            
            99.18
      to PNM’s Annual Report on Form 10-K for fiscal year ended December 31,
      1996
            1-6986
              PNM99.19
            Agreement
      No. 13904 (Option and Purchase of Effluent), dated April 23, 1973, among
      Arizona Public Service Company, Salt River Project Agricultural
      Improvement and Power District, the Cities of Phoenix, Glendale, Mesa,
      Scottsdale, and Tempe, and the Town of Youngtown (refiled)
            
            99.19
      to PNM’s Annual Report on Form 10-K for fiscal year ended December 31,
      1996
            1-6986
              PNM


D-27





99.20
            Agreement
      for the Sale and Purchase of Wastewater Effluent, dated June 12, 1981,
      Among Arizona Public Service Company, Salt River Project Agricultural
      Improvement and Power District and the City of Tolleson, as amended
      (refiled)
            
            99.20
      to PNM’s Annual Report on Form 10-K for fiscal year ended December 31,
      1996
            1-6986
              PNM99.21*
            1996
      Supplemental Indenture dated as of September 27, 1996 to Trust Indenture,
      Mortgage, Security Agreement and Assignment of Rents dated as of December
      16, 1985 between State Street Bank and Trust Company, as Owner Trustee,
      and The Chase Manhattan Bank, as Indenture Trustee
            
            99.21
      to PNM’s Quarterly Report on Form 10-Q for the quarter ended September 30,
      1996
            1-6986
              PNM99.22
            1997
      Supplemental Indenture, dated as of December 23, 1997, to Trust Indenture,
      Mortgage, Security Agreement and Assignment of Rents, dated as of August
      12, 1986, between State Street Bank and Trust, as Owner Trustee, and The
      Chase Manhattan Bank, as Indenture Trustee
            
            99.22
      to the Company’s Annual Report on Form 10-K for the year ended December
      31, 2006
            1-6986
              PNM








___________


*
            One
      or more additional documents, substantially identical in all material
      respects to this exhibit, have been entered into, relating to one or more
      additional sale and leaseback transactions. Although such additional
      documents may differ in other respects (such as dollar amounts and
      percentages), there are no material details in which such additional
      documents differ from this exhibit.





**      Designates
each management contract or compensatory plan or arrangement required to be
identified pursuant to paragraph 3 of Item 15(a) of Form 10 -K.








‡Certain
instruments defining the rights of holders of long-term debt of the registrants
included in the financial statements of registrants filed herewith have been
omitted because the total amount of securities authorized thereunder does not
exceed 10% of the total assets of registrants. The registrants hereby agree to
furnish a copy of any such omitted instrument to the SEC upon
request.








D-28


SIGNATURES





Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.








PNM
      RESOURCES, INC.(Registrant)Date:  March
      2, 2009
            By
            /s/
      J. E. SterbaJ.
      E. SterbaChairman
      and
              Chief
      Executive Officer





Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.





Signature
            Capacity
            Date/s/
      J. E. Sterba
            Principal Executive Officer and
            March
      2, 2009J.
      E. Sterba
              Chairman
      and
              Chief
      Executive Officer
            Chairman of the Board/s/
      C. N. Eldred
            Principal
      Financial Officer
            March
      2, 2009C.
      N. Eldred
              Executive  Vice
      President and
              Chief
      Financial Officer/s/
      T. G. Sategna
            Principal Accounting Officer
            March
      2, 2009T.
      G. Sategna
              Vice
      President and
              Corporate
      Controller/s/
      A. E. Archuleta
            Director
            March
      2, 2009A.
      E. Archuleta/s/
      J. A. Dobson
            Director
            March
      2, 2009J.
      A. Dobson/s/
      W. L. Hunt
            Director
            March
      2, 2009W.
      L. Hunt/s/
      R. R. Nordhaus
            Director
            March
      2, 2009R.
      R. Nordhaus/s/
      M. T. Pacheco
            Director
            March
      2, 2009M.
      T. Pacheco/s/
      R. M. Price
            Director
            March
      2, 2009R.
      M. Price/s/
      B. S. Reitz
            Director
            March
      2, 2009B.
      S. Reitz/s/
      D. K. Schwanz
            Director
            March
      2, 2009D.
      K. Schwanz/s/
      J. B. Woodard
            Director
            March
      2, 2009J.
      B. Woodard





E-1


SIGNATURES





Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.








PUBLIC
      SERVICE COMPANY OF NEW MEXICO(Registrant)Date:  March
      2, 2009
            By
            /s/
      P. K. CollawnP.
      K. CollawnPresident
      andChief
      Executive Officer





Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.








Signature
            Capacity
            Date/s/
      P. K. Collawn
            Principal Executive Officer and
            March
      2, 2009P.
      K. Collawn
              President
      and
              Chief
      Executive Officer
            Director/s/
      C. N. Eldred
            Principal Financial Officer and
            March
      2, 2009C.
      N. Eldred
              Executive
      Vice President and
              Chief
      Financial Officer
            Director/s/
      T. G. Sategna
            Principal Accounting Officer
            March
      2, 2009T.
      G. Sategna
              Vice
      President and
              Corporate
      Controller/s/
      A. A. Cobb
            Director
            March
      2, 2009A.
      A. Cobb/s/
      E. J. Ferland
            Director
            March
      2, 2009E.
      J. Ferland/s/
      J. E. Sterba
            Chairman of the Board
            March
      2, 2009J.
      E. Sterba























































E-2


SIGNATURES





Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.








TEXAS-NEW
      MEXICO POWER COMPANY(Registrant)Date:  March
      2, 2009
            By
            /s/
      P. K. CollawnP.
      K. CollawnPresident
      andChief
      Executive Officer





Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.





Signature
            Capacity
            Date/s/
      P. K. Collawn
            Principal
      Executive Officer and
            March
      2, 2009P.
      K. Collawn
              President
      and
              Chief
      Executive Officer
            Director/s/T. G.
      Sategna
            Principal
      Financial Officer and
            March
      2, 2009T.
      G. Sategna
              Vice
      President and
              Controller
            Principal Accounting Officer/s/
      A. A. Cobb
            Director
            March
      2, 2009A.
      A. Cobb/s/
      J. E. Sterba
            Chairman
      of the Board
            March
      2, 2009J.
      E. Sterba


















































































E-3